Escrow mortgages are loans that require you to set aside funds each month for taxes and insurance. Lenders require these escrow accounts because failing to pay these essential bills on time could lead to major problems that could ultimately lead to your home being foreclosed upon.
Your lender reviews your escrow account annually to guarantee there are enough funds in it for property taxes and insurance premiums. If there’s a shortage, they may increase your monthly mortgage payment accordingly.
Why have an escrow account?
If you own a home, chances are you have an escrow account – a money management tool that collects payments for property taxes and insurance on your behalf. Typically, this account is managed by your mortgage lender or loan servicer and they’ll send you an annual escrow statement.
Escrow accounts make paying your property taxes and homeowners insurance much simpler, since the funds are automatically deducted from your monthly mortgage payment. Plus, you won’t be charged interest on money in your escrow account – which can add up quickly.
Your escrow payment may fluctuate annually based on changes to your mortgage’s tax and insurance costs. Your lender or servicer will also send you an annual escrow estimate.
Most people opt for an escrow account in order to avoid having to foot the large bill for property taxes and insurance on their own. It can also be beneficial to set aside extra money in an escrow account as a safety net in case you might run into financial difficulty while trying to pay your bills.
What happens if I don’t pay my escrow bill?
Home buyers rarely fail to make timely premium payments from their escrow accounts. Maintaining a large enough escrow account is in the best interests of both your lender and insurer.
However, mistakes can still happen. You could end up paying a tax bill that was never received or being accused of purchasing unnecessary insurance.
Your lender or servicer should conduct an escrow analysis at least annually to help you navigate these tricky waters. They’ll also give you a heads-up if it’s time to start saving for your next property tax or insurance bill, since mortgage payments rarely keep up with these expenses. So having an effective escrow plan in place is essential for long-term financial security and happiness.
What happens if I’m short on my escrow payment?
Escrow accounts are financial holding accounts that store the money necessary to pay your property taxes and insurance. You do not manage this account yourself; rather, it is managed by your lender who collects the funds on your behalf.
If your escrow payment is less than what was expected, it could indicate that you underestimated the amount of taxes or insurance to be deducted in last year’s analysis or have higher costs than anticipated.
In such cases, your escrow servicer may advance you money from their own funds to cover any shortage and your escrow bills – this is known as an “escrow advance”.
Your next escrow analysis will show the amount of the shortage, so you’ll know when to expect an increase in payments. If it’s still outstanding, it may be possible to pay it off over time. Many lenders allow for either one lump sum payment or adding part of it onto each monthly payment.
What happens if I cancel my escrow account?
Escrow accounts enable home ownership expenses like property taxes and insurance to be prorated. When you pay your mortgage payment, the lender adds one-twelfth of that amount into an escrow account which then funds all necessary items like taxes and insurance.
If you would rather take control of paying your tax and insurance bills yourself rather than leaving them with your lender, you can cancel the escrow account by sending a written request to the lender or loan servicer.
Removing your escrow account means more paperwork for you, as you must track and document when you pay taxes and insurance premiums. Furthermore, interest earnings that would otherwise go into the escrow account could be lost.
To cancel your escrow account, you must meet certain criteria such as having a year of good credit history with no late payments, and no taxes or insurance due within 30 days of requesting cancellation.