If you have a mortgage escrow account, you make an additional payment to your lender each month to be held until a property tax payment or your homeowner's insurance premium is due. The lender determines how much you pay each month by estimating the yearly totals for these bills. However, sometimes the lender overestimates, and you end up paying more than you owe. If this occurs, the lender details it on the statement provided to you at the end of the year and issues a refund if necessary.
Escrow Accounts
Homeowners have the responsibility to pay property taxes and homeowner's insurance premiums. If you don't make these payments on time, you could lose your home through tax foreclosure or have your policy dropped. Your lender doesn't want either of these scenarios to happen because it has an interest in your property until the mortgage loan is paid in full. To ensure that taxes and insurance are always paid on time, many lenders require their borrowers to maintain an escrow account. Each month, you pay the lender, who pays the bills directly on your behalf.
Calculations
The lender determines the monthly payment by adding up the total amount due for taxes and insurance for the year. It obtains this information based on data from the tax collector and insurance companies or past data. The grand total is divided by 12 to reach the monthly payment amount. Lenders are allowed to collect an additional amount to act as a cushion, in case they underestimate. This overage can equal up to two months of payments.
Yearly Adjustments
Toward the end of the year, your lender reviews your escrow account and creates a summary of the year. The summary statement shows the payments into and out of the account. At this time, the lender also reassesses the monthly payment amount. It reviews data or gets an estimate to determine if the tax and/or insurance bills will go up or down. Property taxes commonly increase over time, but this might not occur on a yearly basis. If an adjustment is necessary, it's explained on the statement.
Refunds
If the review of your escrow account shows an overage amount, the Federal Deposit Insurance Corporation has legislation in place to determine how the lender must process the overage. If the overage amount is less than $50.00, the lender can use it as a credit toward the escrow account. If the amount is greater than $50.00, the lender is required to refund it to you directly, typically by check. Although the lender is supposed to check for overages, it might miss something or calculate in error. Keep track of your records and payments made on your own. If you believe a refund is warranted but you didn't receive one, write a letter to your lender and provide supporting receipts to request a refund.