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July 1, 2020
Though escrow accounts are common, you may find yourself asking a lot of questions about them. We already explained some of the escrow basics, but to help gain a better understanding of what to expect, here are some common questions, answered.
Escrow (also known as an impound account) acts like a savings account managed by your mortgage provider. Your escrow account is separate from your mortgage, but every time you make a mortgage payment a chunk of it put into escrow and used to make payments on your real estate taxes and insurance premiums.
Your escrow account allocates your costs throughout the year in monthly payments. So, instead of coming up with large sums once or twice a year or keeping track of all your home-related payments, your mortgage servicer does it for you with the money in you escrow account.
Plus, you don’t have to worry about missed or late payments, because your lender takes care of making these payments by their due dates. One less thing to worry about!
Your escrow account is unique to you! It is calculated by adding up your property and school taxes, with your homeowners insurance for the year, and then divided by 12. That number is then added to your monthly mortgage payment.
Keep in mind, you’ll need to have the money at closing to fund the escrow. This total could vary, depending on the month you close and when your taxes are due.
An escrow cushion are funds that a servicer may require you to keep in your escrow account to cover disbursements that are either unanticipated or made before your payments are available. Federal law caps this cushion at 1/6 of your total escrow charges.
An escrow analysis is an annual review of the amount of funds held in your escrow account to ensure the correct amount is being withdrawn. This analysis also determines if the borrower needs to pay money to make up a shortage or if the lender has collected too much money, which entitles the borrower to a refund. This analysis is required under the Real Estate Settlement Procedures Act (RESPA).
The most common reason for an increase in your payment is due to the increase of property and/or school taxes. As taxes go up, your escrow payment will go up. Homeowner’s insurance fees can rise as well, but typically the increase is minimal. Keep in mind, your escrow payment can decrease as well. This usually is because your property value went down, resulting in a lower tax assessment and lower escrow payment.
You can consult your local tax authorities to review your taxable amount and discuss any inconsistencies or if you for exemptions.
Have additional questions about escrow accounts? A NewRez Loan Advisor can provide you with more information. Get in touch with us today!