If you have purchased a home or been in the market, you have probably heard the term “escrow”
thrown around a lot. If you have never had to actually deal with it, the entire subject might be a little
fuzzy.
Escrow is a separate account from a mortgage account where the deposit of funds takes place in order to pay for certain conditions that apply to the mortgage, usually property taxes and insurance. Since a
mortgage lender does not want to take a chance that a homeowner will miss paying property taxes,
escrow is usually required under the terms of a mortgage.
Rising property tax will cause an increase in the escrow on a fixed rate mortgage loan. A higher tax
assessment typically means that property values are increasing in the area or something like a
renovation or improvement has been made to the home to have it increase in value. Voters may also
elect to increase property taxes.
A mortgage lender is required to perform an annual analysis on each borrower in escrow. Certain
regulations exist for lenders on the limits they must require a member to keep an account in escrow to
pay taxes and insurance. The minimum amount for an escrow balance is typically the equivalent of two months worth of escrow payments.
An escrow analysis can lead to a fluctuation in monthly escrow payments; it may show you have either a
shortage or a surplus. Any changes in the monthly escrow payments you have are likely due to tax or
insurance increases. If taxes and/or insurance fall below the required minimum amount, you could
experience a shortage or surplus. The analysis goes over the calculations for next and what they project
the balance to be for the coming year, based on the status of current expenses from taxes and insurance.
