What is an Aggregate Adjustment?

In a recent blog, we broke down everything you need to know about escrow accounts. In case you missed it, here are a few key takeaway points that will be good to know for later.

Point 1: An escrow account is typically used for two reasons-- to protect a homebuyer's "good faith" deposit before the transaction closes and afterward, to hold the homeowner's funds for taxes and insurance.

Point 2: Once you become a homeowner, you will fund the escrow each month as part of your total monthly mortgage payment.

Final Point: Some loans will require an escrow account to be set up as an additional safety net for the lender, such as an FHA loan. Regardless of whether your state, lender, or loan requires an escrow account, it's beneficial to have one in place.

What is an Aggregate Adjustment?

After applying for a mortgage, your lender must provide a Loan Estimate within three days of receiving your application. This will give you all of the most pertinent information about your loan.

Your Loan Estimate includes:

• Your estimated interest rate
• Monthly mortgage payments
• Total closing costs
• Estimated costs of taxes and insurance
• Any potential future changes to the interest
• Possible penalties

Between the day you apply for a mortgage and the day you close, a lot can change in this estimate. Because of this, your lender may need to make an aggregate adjustment, which is a calculation your lender will use to make sure the correct amount of money is collected in your escrow account at the time of closing. For your lender to stay in compliance with RESPA, they cannot keep more than 1/6 of your annual property tax and insurance payment as a "cushion" in your escrow account at any one time.

At least three business days before you close on your mortgage, your lender will provide you with a Closing Disclosure. These documents detail the financial specifics of your mortgage, including:

• Your final interest rate
• Monthly mortgage payments
• Total closing costs
• Costs of taxes and insurance
• Any potential future changes to the interest, such as an adjustable-rate

Making Payments from Year-to-Year

Each year, your bank receives updated information on your property taxes and insurance payments. They will then perform what's often referred to as an escrow analysis.

Because escrow is collected in advance, your lender might not have enough funds in your account to cover any increase in taxes or insurance, otherwise known as a "shortage." In this case, you will owe the difference. However, you won't be held responsible for this payment until the bank sends you a notice stating the amount outstanding.

Once you receive the notice, you can choose to pay the entire shortage as one lump sum, or you can choose to pay the amount over the next year. For example, if the shortage is $500, you will pay 1/12 of this amount each month.

In the Event of a Surplus

If taxes in your area happen to go down or your payments are overestimated, you will have too much money in your escrow account at the end of the year. Your lender will then pay the appropriate amount to the municipality, and the remaining amount goes to you.

Your lender will either send you a check for the surplus amount or give you the option to leave the money in your escrow account in case of a shortage in the upcoming year.

Budgeting for the Future

Anticipating whether or not you'll be required to pay more on your escrow account can be difficult to do. If you prefer to plan ahead, pay attention to any correspondence from your insurance company or taxing authority throughout the year, and budget accordingly.

You find the home. We'll get you the loan. Contact a licensed Mortgage Advisor today for more information.