What is Escrow?

There are two types of escrow in the mortgage business:

·         Loan-origination escrow occurs when a third party, such as a title company or an attorney, holds a nonrefundable earnest-money deposit for you during the process of buying a house. Once the sale goes through, that money can be put toward the down payment.

·         Loan-servicing escrow is a long-term account that we maintain for you throughout the life of your mortgage loan. When you make a mortgage payment each month, we put some of that payment into your escrow account and use it to cover your property taxes and homeowners’ insurance bills. This is the type of escrow we’ll discuss in this article.

We manage escrow accounts for most of our customers. The exceptions are customers who paid 20% down or more when they purchased their house, and elected not to have an escrow account.

How does my escrow account work?

You “deposit” money into your escrow account each month when you pay your mortgage. We hold the money for you, then withdraw the funds when it comes time to pay for property taxes and homeowners insurance.

In some states, other property-related costs such as HOA fees or private mortgage insurance premiums may be paid from your escrow account. See your mortgage contract for details on what is included in your account.

Why should I have an escrow account?

If you have an escrow account, you don’t have to think about budgeting for a big property tax bill or saving up for your insurance payment. Those hefty expenses are split into smaller chunks that you’re already paying when you make your monthly mortgage payment. You won’t have to worry about being late on property taxes or missing an insurance payment—we’ve got those things covered.

Do I need to send you my property tax and insurance bills?

No, you don’t have to worry about that, either. Your local property tax office and your homeowners insurance company send us copies of your bills. If we do need anything, we will notify you by mail.

What if there is extra money in my escrow account?

We maintain a “cushion,” or minimum balance, in your account of no more than two escrow payments to help cover unexpected increases in your taxes or insurance premiums.

On occasion, we end up depositing more money into your escrow account than is needed to pay your property tax and insurance bills and maintain your cushion. Beyond these amounts, if you have an escrow surplus of more than $50, we’re required by law to return that money to you. We do so by mailing you a check when you get your escrow analysis letter.

What is an “escrow analysis”?

Taxes and insurance premiums can fluctuate for any number of reasons. Because of this likelihood, we analyze your account at least once a year to see if we need to adjust your monthly payment so that property taxes and insurance costs will be adequately covered. The timing of your escrow analysis depends on the state you live in (see table below).

We’ll review your property tax and insurance bills and compare them to the amount being held in your escrow account. If there is a shortfall, we will increase your monthly payment. An escrow analysis can also result in a decrease in your monthly mortgage payment, depending on your tax and insurance bills.

Once the analysis is complete, we notify you about the analysis and any changes to your payment by emailing you a personalized video. We will follow up about 10 days later by mailing you a detailed letter.

If you live in...                                                                            We will analyze your escrow account in…

Why did my payment change?

·         Your property taxes or insurance premiums changed. This is the most typical reason for a change. Sometimes we find that your escrow account doesn’t have enough funds in it to cover these costs, and in this case, you would see an increase.

·         You have an adjustable-rate mortgage (ARM). If this applies to you, your payment may have changed because we recalculated your interest rate.

Why would my escrow account have a shortage?

As mentioned, we do maintain a cushion of no more than two escrow payments in your account to help cover jumps in your property taxes or homeowners insurance. However, unexpected changes in your taxes or insurance can result in an escrow shortfall:

·         Unexpected cost increases. Your property taxes or insurance may have increased beyond what we anticipated. This is because our escrow analysis relies upon estimates of the coming year’s taxes, based on last year’s taxes. We always try to be as accurate as possible, but sometimes taxes are steeper than expected.

·         Due date change. The due date of your insurance or tax bills may have shifted.

·         Insufficient deposits. Less than we expected may have been deposited into your account.

·         Unexpectedly high payouts. We may have had to pay out more from your account during the previous year than we’d anticipated.

What do I do if my payment changes?

This depends on how you pay:

·         If you pay using autodraft, you don’t need to do anything. We will automatically charge the new amount to your bank account.

·         If you use an online bill pay system, update your settings to the new payment amount.

·         If you pay via check or money order, make out your check or money order for the new amount, and mail it so it arrives in our office before 3 p.m. Eastern Time on the date your bill is due.

What if there’s a mistake in my escrow account?

It’s rare but possible for an error to occur with your escrow account. If you suspect an error, reach out to us through the chat function on your online account dashboard, and we will work to fix any issues.

A few things you might want to monitor:

Be aware of your tax and insurance bill due dates. Though we are responsible for paying these bills, if you ever receive a notice of non-payment, notify us immediately.

Learn about property taxes in your area. Your local tax authority’s website should post tax rates, answer basic questions and share contact information for your tax assessor’s office.

Monitor your escrow account. View your most recent statements on our website. Sign in with your Username and Password, and click on your Loan ID. Then click on Mortgage Assistance, select Available Documents, then choose MG-Escrow.

Are there any advantages to not having an escrow account?

For many people, there are not significant advantages to not having an escrow account. Many mortgage agreements require an escrow account, so those homeowners don’t have the option to cancel their accounts.

Some homeowners are not required to have escrow accounts. If you put 20% down or more when you purchased your home and you received a non-Federal Housing Administration (FHA) mortgage, you might not be required to have an escrow account. If you fall into this category and do not want an escrow account, you will have to manage your property tax and insurance payments on your own.

Many people who aren’t required to have an escrow account choose to have one anyway because they enjoy the convenience of not having to think about their property tax and insurance bill.

If your income varies—for example, if you’re self-employed—you might want to save for tax and insurance expenses in bigger chunks during months when you make more money. In this instance, an escrow account might not be the best solution for you.

Can I cancel my escrow account?

Maybe. If your loan type and mortgage allow for it, you can cancel your escrow account with us. Please do so in writing by going to our website and then clicking on the Contact Us page. We’ll review your request and respond within 30 days.

Important note: We cannot cancel your escrow account if your payment history shows fewer than 12 consecutive months of on-time payments.

Here’s a general overview of escrow requirements for different types of loans:

Escrow accounts are always required for FHA loans and are typically required for Veterans Administration (VA) loans. Escrow accounts aren’t required for VA-guaranteed home mortgages, but if your VA loan does have an escrow account, you will generally need at least 10% equity in your home and a decent credit score to cancel an escrow account on a VA loan.

For higher-priced mortgage loans (HPMLs), escrow accounts are required for at least five years. You’ll need to have built up at least 22% equity in your home before attempting to cancel.

With most conventional loans, it is typically your lender who decides if an escrow account is required. If you put down 20% or more when you bought the house, you might be able to waive escrow, but you also might have to pay an escrow-waiver fee.

Many lenders are willing to cancel your escrow account once you’ve built up a good chunk of equity (at least 20-25%) in your property. However, if you cancel escrow and then don’t pay property taxes or homeowners’ insurance on your own, your mortgage agreement allows us to reinstate your escrow account.

Before attempting to cancel your escrow account, consider whether you want to give up the convenience of not having to think about paying property taxes and insurance. You will be responsible for budgeting for these expenses and then paying them when they are due, often in larger amounts annually, rather than segmenting them into smaller payments throughout the year.

If you pay these expenses late, you will face late fees, and then we are required to step in and take over payment for you. If you fail to pay your mortgage insurance, we will also have to buy homeowners insurance for you, which tends to be more expensive than if you shop for it yourself.

Are the property taxes held in escrow tax-deductible?

Yes! You can deduct property taxes, but we recommend working with your tax advisor to understand the details. Remember, do not deduct the amount we deposited into your escrow account—only deduct the amount we paid for property taxes.

Property taxes are paid annually or several times a year, depending on your local tax authority. The amount paid will be included in the escrow analysis we send to you. You can also see how much was paid by looking at the IRS Form 1098 (Mortgage Interest Statement) that we send to you each year.

View your most recent statements on our website. Sign in with your Username and Password, and click on your Loan ID. Then click on Mortgage Assistance, select Available Documents, then choose MG-Escrow.