What Happens to My Escrow at the End of the Year?

The busyness of the holidays usually means present exchanges, shared meals, and time spent with friends and family. It can be easy to put off planning for the new year. Even though it's tempting, we encourage you to make time to review your budget for the upcoming year. One account that homeowners tend to forget about is their escrow account.

MORTGAGE LINGO: An impound account, sometimes called an escrow account depending on where you live, pays certain property-related expenses, such as taxes and homeowners insurance.

The money that goes into the account comes from a portion of your monthly mortgage payment. An escrow account helps you pay these expenses because you send money through your loan servicer every month instead of having to pay a big bill once or twice a year. (Many lenders require that you pay your taxes and insurance using escrow, so they can make sure that the bill gets paid.)

How it Works

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 hard to keep track of. If you prefer to plan ahead, pay attention to any correspondence from your insurance company or taxing authority throughout the year, and budget accordingly.

Still have questions? Contact a Mortgage Advisor today to learn more about how escrow accounts factor into the homebuying process.