What are Escrow Accounts and Annual Escrow Disclosure Statements?
An escrow account is maintained on your behalf by your loan servicer in order to ensure your annual expenses for real estate taxes and insurance are paid in full when due. Every time you make a mortgage payment, a specific amount is set aside and placed into your escrow account. Then this account is used to pay your real estate taxes and insurance when they're due.
An Annual Escrow Disclosure Statement is a form you receive from your loan servicer detailing its budget and projections with your escrow account. At least once a year, your loan servicer will perform a review of your escrow account to ensure the escrow portion of your monthly mortgage payment is sufficient to cover the real estate tax and insurance payment requirements. This statement will advise you if there is a shortage or surplus in your account, and whether monthly payments need to be increased or can be decreased in the future as a result of this analysis. You may also be required to send a lump sum of money to make up for dramatic shortages.
Essentially, the analysis compares three things to ensure all is copacetic: 1) your current escrow account balance 2) your monthly escrow account payment amount, and 3) premiums for property taxes and insurance.
Under Federal Law, loan servicers are required to maintain a minimum balance in your escrow account as a safeguard in the event your real estate taxes and/or insurance premiums increase. As such, this info will be provided to you with the statement in order to detail the required payments for your escrow account to remain intact and solvent.
NOTE: the basic terms of your home loan do not change as a result of this analysis. If you have a fixed rate loan, the payment will remain the same for principal & interest for the life of your loan. However, you may see your overall monthly payment increase if your loan servicer notifies you that an increase in real estate taxes and/or insurance dictate a need to increase the escrow portion of your payment. This is to ensure the escrow account is funded sufficiently in order to pay those premiums when due.
For example, if your loan servicer receives an updated insurance policy showing a $120 annual premium increase, that would adjust your payment upward by $10/month in order to account for the change.
Feel free to contact us regarding this, or any other home loan & tax questions...we’re happy to help!