Can I Pay My Escrow in Advance? How It Works
Discover how to manage your mortgage escrow effectively, including making advance payments and understanding their financial implications.
A mortgage escrow account is a specialized account managed by your mortgage lender or servicer. Its primary purpose is to collect and hold funds for property-related expenses, specifically property taxes and homeowner’s insurance premiums. This arrangement helps ensure timely payment of these significant annual or semi-annual obligations, reducing the risk of late fees, penalties, or tax liens. Escrow accounts are common and often mandatory for many homeowners, particularly with certain loan types or smaller down payments.
Understanding Escrow Account Balances
Mortgage servicers manage escrow accounts by conducting an annual escrow analysis, a review comparing the money collected from your monthly payments with the projected costs of property taxes and insurance premiums for the upcoming year. This analysis helps determine if your account has a surplus, indicating excess funds or a shortage. An escrow shortage occurs when there isn’t enough money in the account to cover anticipated expenses, often due to unexpected increases in property taxes or insurance.
When a shortage is identified, lenders address it by increasing your monthly mortgage payment to collect the necessary funds over the next 12 months. This adjustment ensures the escrow account has sufficient funds to meet its obligations and maintain any required cushion, usually equivalent to two months of escrow payments. The annual escrow analysis statement provides a breakdown of these calculations and any resulting changes to your monthly payment.
Making Additional Escrow Payments
Homeowners can make additional or advance payments to their escrow account. This proactive step is useful if you anticipate a shortage or wish to prevent a significant increase in your monthly mortgage payment. Contact your mortgage servicer first to understand their policies and procedures for accepting such payments.
Your servicer can clarify the available options, which may include a one-time lump sum payment to cover an identified shortage or temporary increases to your regular payments. Common methods for making these additional payments include:
Online portals
Phone payments
Mailing a check
Arranging a bank transfer
Always obtain confirmation that your payment has been received and correctly applied to your escrow account.
Impact of Advance Escrow Payments
Making an advance payment to your escrow account adjusts the balance within that account. These additional payments do not reduce your mortgage principal balance or the total interest paid over the life of your loan. The primary benefit of an advance escrow payment is resolving an existing escrow shortage, which can prevent or reduce an increase in your monthly mortgage payment.
If an advance payment results in a surplus in your escrow account after the annual analysis, your lender may issue a refund. Lenders are required to refund any surplus exceeding $50. If the surplus is less than $50, the lender may retain the funds as part of the account’s cushion or apply them towards the next year’s escrow payments.