When it comes to mortgage payments, escrow accounts can be one of the most confusing elements for homebuyers and even experienced homeowners. An escrow analysis is a review of your account that is conducted at least once a year by your lender or servicing entity. This analysis will tell you if you have a shortage and if your monthly payments will increase due to an increase in your taxes or in the insurance rate. Government regulations also allow escrow companies to keep an additional amount in your account as compensation in the event of unexpected payments.
You generally can't access the money from your escrow balance that the lender or loan service company has in your name. Mortgage lenders require that you have a certain margin in your escrow account, which is generally equivalent to a specific number of months of escrow payments. When property values, tax rates, or insurance premiums fall, there could be a surplus in your escrow account. You will then receive a notice indicating a larger monthly mortgage payment that will remain in effect at least until the next review of the escrow account.
The second thing you can do if you're concerned about the possibility of a deficit is to make a special payment or a portion of the payment that is specifically intended for your escrow account. When your taxes or insurance are due, the company that administers the loan will withdraw the money from your escrow balance to pay those bills. Despite the 3 months of taxes and insurance collected at closing, an escrow account usually has approximately 1 month of “cushion” for both its taxes and insurance. Within a month or two of that analysis, you should receive a letter stating if you're short, if you've paid too much, or if you're in the Goldilocks area if it's the right thing to do. This happens when you don't have enough money in your escrow account to pay for all your escrow items, such as taxes and insurance.
If your monthly escrow payments can't cover the difference, you may experience an escrow deficit. This way, if your escrow account falls short, you'll have the additional funds to pay immediately instead of adding them to your monthly payment. Some people choose to apply the excess escrow checks that they return to their account to try to avoid future shortages. There is no federal mandate requiring the maintenance of collateral in an interest-bearing account, and many don't earn interest. The problem is that different counties do their assessments at different times of the year, so it can often be impossible to synchronize your property tax movements exactly with those in your escrow account.
