What you need to know about your escrow statement
If you own your home, chances are you have an escrow or impound account with your mortgage lender (assuming you financed its purchase). This account is used to pay property-related expenses like property taxes, mortgage insurance, and homeowners insurance, all of which are included in your monthly mortgage payment.
As the end of the year approaches, you will likely receive an annual statement for this account from your lender. These statements contain a lot of information, and for new owners, they can be a little confusing. So we’ll show you how to read your mortgage escrow statement.
What is an Escrow Account?
But first, a reminder about escrow. An escrow account is a type of financial account created and maintained by your lender (usually, although any third party can do this). A portion of your monthly mortgage payments goes into the account — monies that include an amortized portion of your home/mortgage insurance premiums and property taxes. When these premiums and taxes are due, your lender pays them on your behalf using money from your escrow account.
Escrow or impound accounts became more common after the Great Recession of 2007-09. This crisis was triggered by a housing market crash, which was caused, in part, by overworked homeowners who were unable to pay their taxes and insurance premiums. For the protection of everyone – lenders, homeowners, municipalities and insurers – a newly created government agency, the Consumer Financial Protection Bureau (CFPB), has established guidelines for escrow accounts.
“One of the best practices that came out of the CFPB, especially for new owners, was to set up an escrow account, so they no longer have this problem,” says Debra Johnson-King, executive director of Global Empowerment Development Corporation. , a HUD-approved housing counseling service, which also works with One United Bank in Florida.
For example, if your property taxes are $2,400 per year and your home insurance premium is $1,200 per year, your mortgage agent will ask you to pay $300 per month into your escrow account. By paying the extra $300 every month, you don’t have to scramble to find $3,600 every year. It’s basically a forced savings account that protects you and your lender from a property tax lien or losing your home to a fire without insurance.
When you have an escrow account, your total monthly mortgage payment includes the principal and interest on the loan, plus your property taxes and home insurance (or hazard insurance), and flood insurance if you’re also in a Flood zone. If you have Private Mortgage Insurance (PMI) or Mortgage Insurance Premiums (MIP), these are also included.
This means that your monthly payments could change, even with a fixed rate mortgage, if your other expenses fluctuate. So if your property taxes or insurance premiums go up, your monthly payments to your mortgage lender will also go up.
What information is on an escrow statement?
Typically, escrow statements have several different sections. “Normally at the top you’ll have your account number, the date the statement was prepared, you’ll have your principal balance, the address of the property, that sort of thing,” says Johnson-King.
The statement will also show your insurance, property taxes and due date for each of these items, as well as the expected disbursement of the amount your lender expects to pay when each of these items is due.
What is a blocked balance?
Your escrow balance is the total amount currently in your escrow account that is held for payments your lender will make on your behalf. This balance reflects the payments you have made to your escrow account less any deductions made to your escrow account – for payment of insurance premiums and property taxes.
Escrow Balance vs Principal Balance
On your paper mortgage statement or online account dashboard, you’ll see two different balances if you have an escrow account: the escrow balance and the principal balance.
- Your escrow balance is the amount held for payments such as insurance and property taxes.
- Your main balance is the amount still owing on your mortgage.
What is an Escrow Shortage?
Lenders often base your escrow payments on estimates of your property taxes and other expenses. If your taxes go up or your property is assessed at a higher value than expected, your escrow account may not be able to cover the full charges. This creates an escrow shortage, also known as an escrow deficit.
In this situation, you may owe a larger lump sum at the end of the year to cover the shortage. If you’re worried about such unforeseen costs, you may be able to pay an extra upfront into your escrow account – an excess known as the escrow cushion.
If you want to create a cushion in your escrow payments, contact your mortgage agent and ask if they will accept you. Each repairer has their own requirements and limits for accepting additional escrow payments.
What to look out for in an escrow statement
However, the amount covered by your escrow account does not depend on your repairer. It is determined by your insurance company and local property taxes. If you recently filed a large insurance claim or your school district recently agreed to replace an asbestos-infested high school, chances are your escrow payments will increase and you could find yourself with a shortage. .
The big point to watch: a shortfall. “Borrowers really need to see if there’s a shortage because that’s going to have the most negative impact on their pocket,” Johnson-King says.
These refunds also apply to intentional “cushion” overpayments. If you end up paying more than you owe, “you should be able to get some money back,” Johnson-King says. “By law, if the account shows a surplus of $50 or more, a check will be sent to you. If the overage is less than $50, it will generally remain in your account, although the exact rules for overage vary from state to state.
You also want to make sure that the amounts withdrawn from the escrow account are up to date. Let’s say you get a new home insurance policy, one with lower premiums. Or, you’ve reached a certain equity in your home and no longer have to pay for private mortgage insurance. Or you have successfully appealed your property assessment.
The lender (or the person managing the escrow account) should be aware of these changes, but don’t assume they will be. “Anytime there’s a change in your financial health, pick up the phone and call someone,” Johnson-King says. If you don’t fix things right, who will?
Final Word on Escrow Statements
Escrow statements make it easy for you to get a breakdown of where your monthly payments are going. Keep an eye out for shortages in the account. Conversely, if you qualify for a property tax reduction or a cheaper home insurance policy, be sure to pursue it – and if things change, be sure to contact your escrow account custodian, to payments are correct.