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Escrow is an important component of homeownership, but for many homeowners, especially first-time home buyers, you can understand escrow accounts and annual escrow analysis can be confusing.
According to a recent annual escrow recognition survey conducted by tax and flood service provider Lereta, 60% of mortgage holders said they didn’t fully understand the escrow account, and about half of those surveyed said they were surprised to see the increase.
Below are some tips to understand how your escrow account works, what it means to escrow analysis, and how to better prepare you for potential changes to your monthly mortgage payments.
Escrow accounts and analysis basics
Escrow accounts help homeowners manage their mortgage-related expenses. As part of your monthly mortgage payment, the homeowner pays into an escrow account. This is used by mortgage lenders to pay annual property taxes, homeowner insurance and other expenses.
At least once a year, lenders review their escrow accounts to determine if they have enough funds to pay the necessary expenses. Within 30 days of completing the review, the lender must share the results on an escrow analysis statement, which may indicate changes to monthly payments.
How to read escrow analysis
The escrow analysis statement must include:
- Monthly payments made to your escrow account in the last 12 months.
- Actual amount paid to taxes and insurance.
- Projected payments for taxes and insurance over the next 12 months.
- The minimum required monthly escrow account balance shortage or surplus amount required to pay items within the next 12 months.
- Change monthly payment amount.
If an escrow analysis reveals that the amount paid in property taxes and/or insurance exceeds the account balance, the expected balance reflects the shortfall. The new minimum escrow balance required may also increase. The lender will split the amount of balance requirements that are projected to be shortfalls over 12 months and adjust monthly mortgage payments to reflect the changes.
If the analysis shows an amount lower than what was paid, the statement indicates a surplus. Your lender can advise you on what to do about the surplus.
One of the most common questions I receive from Arvest Mortgage customers is, “Why is my monthly payment being changed?” The most common reasons include changes to property tax bills, such as changes to tax rates or property valuation determined by the tax authorities, changes to homeowners, mortgages or other insurance, such as changes to tax rates or property valuation.
How to manage your monthly mortgage payments
Increases in insurance and property taxes can be a burden for many homeowners with tight budgets. According to a Lereta survey, 44% of respondents said they would experience difficulties if their mortgage payments increased.
Check with your insurance agent for what you can do to keep your premiums affordable. If you are considering changes that could affect your premium, we recommend doing so before the escrow analysis month.
If you expect an escrow shortfall due to an insurance or tax hike, consider placing the expected increase in your savings account. Paying the entire expected escrow shortage in one lump sum will reduce the impact of the shortage on your monthly payments.
Escrow accounts help homeowners simplify their annual property tax and insurance payments. Understanding the basics of an escrow account and how property tax and insurance changes affect your monthly payments will help you manage your monthly expenses and be prepared to gain financial security.
Mitch Wilkins is a mortgage lender supervisor for Arvest Bank – Springfield Region. He can be contacted at mwilkins@arvest.com.
