How Much Is Escrow Per Month & How Is It Calculated?
Understand the essential elements and precise methods behind your monthly mortgage escrow. Learn how it's calculated and why it changes.
An escrow account, in the context of a mortgage, is a holding account for funds collected by your mortgage lender. Its primary purpose is to ensure critical property-related expenses, such as property taxes and insurance premiums, are paid on time. Managed by the lender or a loan servicer, this account simplifies financial management for homeowners by consolidating these payments and ensuring recurring obligations are met.
Components of Monthly Escrow Payments
A mortgage escrow account covers key expenses integral to homeownership. Property taxes, levied by local government authorities based on your property’s assessed value, are a common component. These taxes can be due annually or semi-annually, depending on the jurisdiction.
Homeowner’s insurance premiums are another significant component, protecting your home against damage from perils like fire or natural disasters and providing liability coverage. These premiums are generally paid annually. Factors like your home’s location, age, construction, and claims history can influence their cost.
Mortgage insurance premiums, including Private Mortgage Insurance (PMI) for conventional loans or Mortgage Insurance Premiums (MIP) for Federal Housing Administration (FHA) loans, can also be part of your escrow. PMI is typically required for conventional loans with less than a 20% down payment. FHA loans generally require MIP regardless of the down payment. Less common charges like Homeowners Association (HOA) dues may also be included.
How Monthly Escrow Payments Are Calculated
Lenders estimate the total annual cost of all escrowed items, including property taxes and insurance premiums. This projection forms the basis for calculating the amount needed over a 12-month period.
This total annual sum is divided by 12 to arrive at a preliminary monthly escrow amount. Lenders are also permitted to collect an additional “escrow cushion” or “buffer.” This cushion, allowed by federal law under the Real Estate Settlement Procedures Act (RESPA), is typically up to two months’ worth of annual escrow payments.
The cushion helps cover unexpected increases or timing differences, ensuring sufficient funds are always available. Your monthly escrow payment will include one-twelfth of the annual expenses plus a portion of this cushion. At closing, an initial escrow deposit is often required to fund the account, covering a certain number of months of expenses and the cushion.
Reasons Your Escrow Payment Changes
Your monthly escrow payment can change over time due to several factors. A common reason is a change in property taxes, which can increase or decrease based on reassessments or changes in local tax rates. Some areas reassess properties annually, others every few years, or only with renovations.
Homeowner’s insurance premiums can also fluctuate. Factors like policy renewals, claims, coverage changes, rising construction costs, or increased risks from natural disasters can cause premiums to increase. Discounts or changes in home features could lead to a decrease.
The removal of mortgage insurance premiums is another significant change. For conventional loans, Private Mortgage Insurance (PMI) can often be removed once your loan-to-value (LTV) ratio reaches 80% of the home’s original value, or automatically at 78%. For FHA loans, Mortgage Insurance Premiums (MIP) generally have different removal rules, often requiring a specific time period or refinancing into a conventional loan. Finally, discrepancies found during the annual escrow account review, such as a shortage or surplus, will directly impact your upcoming monthly payments.
Annual Escrow Account Review
Mortgage lenders conduct an annual escrow analysis to ensure the account has sufficient funds for anticipated expenses and to maintain the federally allowed cushion. This review compares actual amounts paid out over the past year with total funds collected. The lender also projects future expenses, using known charges or estimates adjusted for inflation.
If the analysis reveals an escrow shortage, meaning the account did not collect enough funds, the lender will typically adjust your monthly payment upwards. This shortage is often spread over the next 12 months, increasing subsequent payments. Homeowners may pay the full shortage in a lump sum to avoid the increased monthly payment.
Conversely, if an escrow surplus exists because the account collected more funds than necessary, the lender generally refunds the excess to the homeowner. Federal regulations typically require a refund if the surplus is $50 or more. If less than $50, the lender may apply it as a credit towards the next year’s payments. Lenders are required by RESPA to provide an annual escrow statement within 30 days of completing the analysis, detailing account activity and any changes.