When Is an Escrow Analysis Done on Your Mortgage?
Explore the review process for your mortgage escrow account, understanding when and why it's assessed to manage property taxes and insurance.
An escrow account functions as a holding account for funds collected by your mortgage servicer to cover property-related expenses like property taxes and homeowners insurance premiums. This account is funded through a portion of your monthly mortgage payment. An escrow analysis is a regular review process conducted by your servicer to ensure the funds collected are sufficient to meet these obligations. This financial arrangement helps manage significant annual expenses by spreading them across monthly payments.
The Purpose of Escrow Analysis
The primary reason for conducting an escrow analysis is to ensure that enough funds are collected to pay property taxes and insurance premiums when they become due. This process helps prevent homeowners from facing large, unexpected bills for these expenses. It also provides assurance to the mortgage lender that these obligations are paid in a timely manner, which helps protect their investment in the property.
Federal regulations, specifically Section 10 of the Real Estate Settlement Procedures Act (RESPA), govern how mortgage servicers manage escrow accounts. This regulation sets limits on the amount a lender can require in escrow and mandates regular analysis to determine if a surplus, shortage, or deficiency exists. The analysis accounts for changes in property tax assessments and insurance premiums, which can fluctuate annually.
Annual Review Schedule
Federal regulations require mortgage servicers to conduct an escrow account analysis annually. This annual review typically happens around the same time each year, often coinciding with the anniversary of the loan or the servicer’s designated escrow computation year. During this review, the servicer projects the upcoming year’s property tax and insurance payments based on the latest available information. They compare these projected disbursements with the current escrow balance and anticipated monthly contributions to determine if the collected amounts are appropriate.
Situations Triggering Additional Analysis
While an annual analysis is standard, certain events can prompt an additional, unscheduled escrow analysis. Loan modifications may necessitate an analysis to adjust the escrow payment. Refinancing involves setting up a new escrow account and a final analysis of the old one. Significant changes in property tax assessments due to revaluations or increases in tax rates can trigger an immediate re-evaluation of the escrow account.
Increases or decreases in homeowners insurance premiums also necessitate an adjustment to the escrow amount. Property sale or mortgage payoff triggers a final escrow analysis to disburse remaining funds. A change in mortgage servicer often prompts an initial escrow analysis.
Understanding Analysis Outcomes
After an escrow analysis, the servicer determines if there is a shortage, surplus, or deficiency in the account. A shortage occurs when the projected funds in the escrow account are not enough to cover the upcoming year’s expenses and maintain the required minimum balance, which is typically a cushion of two months’ worth of payments. If a shortage is found, servicers commonly spread the amount over the next 12 monthly payments, increasing the homeowner’s monthly obligation. Homeowners also have the option to pay the full shortage amount in a single lump sum to avoid a payment increase.
Conversely, a surplus means there are excess funds in the escrow account beyond what is needed for the upcoming year’s expenses and the cushion. Federal regulations require servicers to refund surpluses of $50 or more to the borrower within 30 days of the analysis. If the surplus is less than $50, the servicer may either refund the amount or apply it as a credit to the next year’s escrow payments.
The analysis adjusts the escrow portion of the monthly mortgage payment to align with new projected tax and insurance costs. Homeowners receive an escrow analysis statement detailing the results of the review, the account’s activity over the past year, projections for the next 12 months, and the new monthly payment amount.