What is escrow?
Think of escrow as a piggy bank. A portion of your monthly mortgage payment goes into your escrow account to cover payments for your real estate taxes and insurance. When your real estate taxes and insurance are due, your mortgage provider will disburse those payments from the escrow account.
Keep in mind that real estate taxes are based on the assessed value of your home and may change based on that assessment. Your mortgage provider will perform an escrow review at least once a year to make sure there’s enough money in the escrow account to cover your taxes and insurance.
Did you know that state and federal laws & mortgage providers require that escrow accounts hold a minimum balance?
The required balance, tax assessment, and recent disbursements are all considered during the escrow review. If the assessment reflects a surplus (more money in the escrow account than you need), your mortgage provider will notify you if a refund is due.
If the assessment reflects a shortage, there are 2 options for paying the shortage:
- Pay the shortage in full.
- Spread the shortage over 12 months, which would increase the monthly mortgage payment.
Sidenote: You can pad your escrow account throughout the year by making monthly escrow-only payments. I take the amount of my last escrow shortage and divide it by 12. That’s the minimum amount I put into my escrow account each month.
I hope this provides some clarity regarding escrow. If you have any questions, let me know. I’ll try my best to answer them.
Until next time,