An escrow account is an account established to pay your property taxes and homeowners insurance. In some states, this is also referred to as an impound account. When your loan is escrowed, a portion of your monthly mortgage payment is deposited into the escrow account. These funds are then used by your loan servicer to pay your property tax and insurance bills on your behalf when they come due. Because property taxes and insurance premiums can change over time, the escrow portion of your mortgage payment may also adjust to reflect those changes.
A typical escrowed mortgage payment includes three components:
The required minimum balance (also known as a cushion) is generally equal to two months of escrow payments (or 1/6 of your total annual tax and insurance amounts). Depending on the state you reside in, this amount may differ, refer to your escrow account disclosure statement for confirmation.
An escrow shortage is based on a forecast (analysis) of what will occur in your escrow account over the next 12 months. In the analysis we consider your current escrow balance, deposits from your future monthly payments, and disbursements we make on your behalf for taxes and insurance. The difference between the lowest point in the future forecast and your required minimum balance is your escrow shortage. This total shortage is divided by 12 and represents the 'escrow shortage' portion of your monthly payment.
Just like an escrow shortage, an escrow overage is based on a forecast (analysis) of what will occur in your escrow account over the next 12 months. If during that analysis the lowest point in the future forecast is greater than your required minimum balance you have an overage. If your overage is greater than $50, you will receive a refund check that will arrive in an envelope separate from your analysis statement. If your overage is less than $50, you will receive a one-time statement credit. Refer to your escrow account disclosure statement to determine which payment the credit will be applied to.
Review your escrow account disclosure statement, most likely your payment increased due to your taxes and/or insurance increasing as compared to the year prior. When this occurs, we must increase the escrow portion of your payment to equal 1/12th of the total annual amount. It's likely that an increase will also cause a shortage in the future forecast (analysis), if this occurs you would see an increase in both the 'escrow' portion of your payment and the 'escrow shortage' portion of your payment.
Yes, paying off your shortage will remove the 'escrow shortage' portion of your payment. However, the 'escrow' portion of your payment will still equal 1/12th of your annual tax and insurance amounts. This amount could be higher than it was in the prior year, so your mortgage payment wouldn't return to the same dollar amount it was previously.
Due to federal regulations the escrow portion of your payment must always equal 1/12th of your total annual tax and insurance amounts. Paying an amount more than your shortage will not reduce your payment to an amount less than 'principal & interest' + 'escrow'. You are welcome to make additional deposits into your escrow account at any time if you foresee a future increase. But take note that if another escrow analysis is run prior to us making that disbursement, it could result in an escrow overage and refund of the overpayment.
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