When you buy a home, you may have an escrow account in addition to your mortgage. In simple terms, this acts as a savings account to pay for your homeowners insurance and property taxes. Your mortgage company will process these payments for you from this account, making it easier to manage these expenses without having to save and pay them separately.
Generally, you’re not required to have an escrow account unless your down payment is less than 20% or you’re using an FHA loan. However, many homeowners find it helpful to ensure funds are available for property taxes and insurance when due.
Your principal payment will not change, but the amount you pay monthly into your escrow account can vary. This is because insurance rates and property taxes can increase year to year. To ensure there’s enough in your escrow account, your lender keeps about a two-month buffer of funds.
You’ll receive an Escrow Analysis Statement each January outlining any changes due to shortages or overages.
Your Escrow Analysis Statement summarizes your escrow activity for the past 12 months and projects the next 12 months. Review it carefully before March 1 to confirm your payments are accurate. The Payment Change section will indicate your next steps based on whether you have a shortage or an overage.
An escrow overage means you have more funds in your account than needed, often due to a decrease in insurance costs, such as securing a lower-cost policy or home improvements like a new roof. If your surplus is over $50, you’ll receive a refund check or can choose to apply the extra amount to your mortgage principal.
An escrow shortage occurs when your account doesn’t have enough funds for the upcoming year, usually due to increased property taxes or homeowners insurance premiums.
You can resolve a shortage in two ways:
If your mortgage is through Arbor Financial, here’s how to update your payments: