An escrow analysis is a review of funds collected and disbursed in your escrow account throughout the year. Your escrow account is typically used to collect and then pay property taxes and/or insurance payments. The analysis is a simple addition and subtraction calculation conducted by the mortgage servicer to determine if your monthly escrow payments made in the previous year were sufficient to cover expenses.
Deposits from your monthly payment are additions to your escrow account. Subtractions from your escrow account are for charges like your tax bill or homeowners insurance premium.
After the escrow analysis is conducted, the servicer will provide the borrower with an annual escrow account statement reviewing the deposits and disbursements made over the length of the escrow year. It is normal for taxes and insurance to change and your monthly mortgage payment will be adjusted each year. The escrow analysis conducted each year ensures you’re contributing the right amount.
Here’s more information on escrow analysis, including:
• Why you need escrow analysis
• How escrow analysis works
• How to read your escrow account statement that comes after an escrow analysis
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Why Do I Need an Escrow Analysis
An escrow account analysis is required under consumer protection laws for the length of escrow. Regulation X of the Real Estate Settlement Procedures Act (RESPA) has mortgage servicers conduct an escrow analysis at the end of each computational year and provide consumers with an escrow account statement. The analysis shows the money coming in from your monthly mortgage payment as well as money going out to pay bills for your taxes and insurance.
The escrow account analysis is necessary to:
• Find shortages or excess funds
• Aim to maintain a balance high enough to pay escrow bills
• Compute a new monthly payment each year from adjusted amounts to escrow bills
If the amount of money exceeded the disbursements, you may see a refund and a lower monthly mortgage payment over the next year. If the amount of money was less than the disbursements, you may have a negative escrow balance and need to make up the difference either in a lump sum or increased monthly payments over the next year.
This analysis also helps keep any excessive escrow monies in your pocket rather than retained with a mortgage servicer.
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How the Analysis Works
When you apply for a mortgage, your lender will conduct an initial escrow analysis before your mortgage servicer sets up your escrow account. This analysis will total up the costs of all the taxes and insurance premiums you will need to pay throughout the year. Then, that amount is divided by 12 to get the monthly amount that you pay into the escrow account each month.
Here’s a quick example with escrowed items:
|Escrow account items||Amount|
|Homeowner’s insurance premium||$1,200|
|Private mortgage insurance||$1,200|
After adding up all the yearly expenses paid through your escrow account, divide it by 12 to get your monthly escrow payment.
$4,200/12 = $350 monthly escrow payment
The amount of your escrow payment will be included with your monthly mortgage payment. Your mortgage servicer will handle the amount that needs to go to your escrow account. When the bill for your taxes or insurance comes, the mortgage lender or servicer will pay it from the escrow account for you.
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Every year, mortgage servicers are required to conduct an escrow analysis on your account and send you an annual escrow account statement. This statement includes how much you contributed to the escrow account each month and how much was distributed to taxing entities and insurance companies.
If, throughout the year, your tax and insurance bills totaled more than your monthly escrow deposits, you will see a negative escrow balance. If your monthly escrow deposits were significantly more than your escrowed bills, you may see a refund.
How to Read Your Escrow Analysis Statement
The primary objective of the escrow account disclosure statement is to document where your escrow account stands. It will detail specific contributions and distributions by month and let you know how your monthly escrow payment will change. It is similar to reading a mortgage statement, but there are several elements that are different.
New monthly payment
The annual escrow account disclosure will show you how your payment is going to change. You’ll see:
• Current payment: This is how much your total monthly payment currently is. It includes both your mortgage principal and interest payment, as well your escrow payment.
• New payment: Your statement will show your new escrow amount, which, when added to the principal and interest amount, will change your total monthly payment.
• Shortage/surplus: If your account had a negative escrow balance in the past year due to an increased tax or insurance bill, you’ll see the amount you owe added to your monthly payment. If you have a surplus, you’ll see that here, too.
• Difference: The statement will include a calculation of the difference between what you were paying in the past year and what you will need to pay in the upcoming year.
• New payment effective date: You will need to change the amount you pay to your mortgage servicer by the date listed on the disclosure statement.
Your escrow account disclosure statement will help explain why there was an increase or decrease in your escrow account. These include changes to insurance premiums and property taxes included in your mortgage payment. You may see a comparison summary of your escrowed items, including:
• County tax
• Homeowners insurance
• Private mortgage insurance, or PMI
Your mortgage servicer will compare how much they expected to pay versus how much was actually paid for the escrowed item.
Repayment of Escrow Shortage or Surplus
If there’s a shortage in your escrow account, your mortgage servicer may provide you with the option to make up the shortage in a single payment. You may see an “escrow shortage coupon” at the bottom of the form that you can mail in with your payment.
It should include your:
• Loan number
• Shortage amount
Because your mortgage servicer is allowed to collect the deficient amount throughout the year, you may not see a due date for a single payment. Keep in mind, however, that this is not the same for a new adjusted payment amount, which must be changed by the payment due date.
If there is a surplus, which is defined as $50 or more, you’ll likely receive a check in the mail.
Escrow Account Projections and Activity History
It’s common to see a table of payments and disbursements by month on an escrow analysis. You’ll see how much you paid each month and when escrowed items were paid. You’ll also see a running account balance, which is important in ensuring there’s enough money to pay for escrowed items throughout the year.
Escrow analysis occurs at the end of each computational year to ensure there’s enough in your escrow account to cover the costs of insurance and taxes. Excess amounts can be refunded to you, while deficient amounts (or shortfalls) can be added to your monthly payment in the next year.
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