Understanding Escrow Adjustments: Navigating The Impact Of New Insurance Policies

An escrow account is a useful tool for homeowners to manage their property taxes and insurance premiums. It is a separate account that is used to make payments on behalf of the homeowner. The escrow account is funded by the homeowner at the closing and funding of a mortgage, and the mortgage servicer manages the account. While escrow accounts are generally required if the down payment on a home is less than 20%, they can also be a convenient way to ensure that insurance premiums and property taxes are paid in full and on time.

An escrow adjustment is a change made to the monthly payments by the mortgage servicer, based on the results of an escrow analysis. An escrow analysis is an audit or review of the escrow account, conducted annually, to ensure that there are enough funds to cover insurance premiums and tax liabilities. If there is a surplus in the escrow account, the homeowner may be entitled to a refund, and if there is a shortage, it must be covered by the homeowner. The escrow analysis statement will outline the changes to the monthly payments and how they relate to taxes and insurance.

When obtaining a new mortgage, the lender may require the homeowner to open an escrow account. In this case, an aggregate escrow adjustment may be necessary to credit the borrower and reduce the amount they must deposit into the account. This adjustment is the difference between the lender's desired reserves and the maximum amount they can collect under the Real Estate Settlement Procedures Act (RESPA).

To calculate the aggregate escrow adjustment, the maximum amount that can be collected under RESPA is determined by dividing the total property tax and home insurance liability by 12, and then creating a running balance based on the monthly payments and payments made from the account. This amount is then subtracted from the lender's desired reserves, which include several months of insurance and property tax payments.

In conclusion, escrow accounts and adjustments are important tools for homeowners to manage their finances and ensure that their insurance and tax payments are up to date. By understanding how escrow accounts work and how to calculate escrow adjustments, homeowners can make informed decisions about their finances and ensure they are compliant with any relevant laws and regulations.

An escrow account is used to pay property taxes and insurance premiums

An escrow account is a legal arrangement in which a third party, in this case, the lender or mortgage servicer, holds money on behalf of the buyer and seller during the home-buying process. It is used to pay property taxes and insurance premiums, such as homeowners insurance, mortgage insurance, or flood insurance. This arrangement ensures that these bills are paid on time and in full, providing convenience and peace of mind to homeowners.

Each month, a portion of the homeowner's mortgage payment goes into the escrow account, which is then used to pay the aforementioned bills when they are due. The amount required for escrow may vary from year to year, depending on changes in tax bills and insurance premiums. Lenders or servicers conduct an annual escrow analysis to ensure they are collecting the correct amount and adjust the monthly payments accordingly.

While escrow accounts offer benefits such as convenience and protection during the home-buying process, there are also some considerations. For instance, having an escrow account results in higher monthly mortgage payments, and incorrect estimates of the required amount may occur due to changes in property taxes or insurance premiums.

Overall, an escrow account is a useful tool for homeowners to manage their property-related expenses and ensure timely payments, but it is important to understand how it works and the potential advantages and disadvantages.

An escrow analysis is an annual audit of your escrow account

The analysis will also determine if there is a surplus or shortage in the account. If there is a surplus, you may be entitled to a refund. If there is a shortage, your monthly mortgage payment may increase to cover the shortfall.

After the analysis is completed, you will receive an escrow analysis statement. This will include:

• Your current monthly mortgage payment, including the amount that goes towards the escrow account.
• The monthly payments you made in the past year and the portion that went into your escrow account.
• The total amount paid into the escrow account in the past year.
• The balance on the account at the end of the analysed period, including how much was paid toward both taxes and insurance.
• Details on what the lender will do with a surplus balance or how they’ll require a shortfall to be covered.
• An outline of the difference between the previous required payment and the new payment.

Escrow accounts are used to make payments on your behalf for real estate taxes and insurance premiums. To make those payments, lenders collect escrow funds as part of your monthly mortgage payment. This ensures that your bills are paid in full and on time.

If there's a shortage, you can pay a lump sum or add to monthly payments

If there's a shortage in your escrow account, you'll need to pay the difference to your lender. You usually have two options: pay the full shortage now in a lump sum, or pay the shortage in instalments over the next 12 months.

If you choose to pay the full amount now, your monthly mortgage payment may still increase if your property tax or insurance costs have increased.

If you spread the payments over the next 12 months, you'll divide the shortage amount by 12 and add the resulting figure to your monthly mortgage payments. This option may be more manageable if you can't pay the full shortage amount upfront.

Some lenders may offer a third option: pay part of the shortage now, and the rest over the next 12 months. This can make the process more affordable, as you can make a partial payment upfront to reduce the escrow shortage, and then spread the remaining balance over your monthly payments for the following year.

It's important to note that paying off an escrow shortage won't necessarily lower your monthly escrow payments. If your property taxes or insurance premiums have increased, your monthly escrow payments may also increase to ensure you have enough funds in your escrow account to cover future bills.

To avoid an escrow shortage, it's recommended to stay informed about any changes to your property taxes and insurance rates. Additionally, consider setting aside extra money in your escrow account or savings to prepare for potential increases in expenses.

If there's an overage, you'll receive a refund or a reduction in monthly payments

An escrow refund is a payment your mortgage servicer issues when there are excess funds in your escrow account following an annual account review. Your escrow account is used to hold funds for payment of homeowner’s insurance and property tax.

Your mortgage servicer uses an escrow account to hold funds for paying home closing costs, such as home inspections and loan fees, and to hold funds used to pay your property taxes and homeowners insurance once you begin making payments. The servicer typically collects a portion of the cost of these annual taxes and insurance premiums with each monthly mortgage payment and keeps the funds in the escrow account until the yearly bills come due.

At the end of each year, the servicer reviews your escrow account to make sure there is enough money to cover the next year's expenses. If the balance in the account exceeds what's needed for anticipated expenses, the lender may refund the difference to you.

For example, let's say your monthly mortgage payment of $2,000 includes $400 for property taxes and $200 for homeowners insurance. Over the course of the year, the mortgage servicer collects $4,800 for property taxes and $2,400 for homeowners insurance, for a total of $7,200. If actual expenses for the year end up being $6,900, there will be a $300 overage in the escrow account, which the servicer will refund to you.

You may also receive an escrow refund when:

• You deposit more in your escrow account with your earnest money or down payment than is ultimately needed to cover closing costs.
• Your escrow account is closed, which happens after you make your final mortgage payment or when you refinance your mortgage with a new lender.

Escrow refunds generally come when there’s an expense that’s smaller than expected, such as a lower insurance bill or fewer taxes. Your mortgage servicer pays the lower amount and then, when the servicer conducts an escrow analysis, the difference will be refunded to you, typically by check.

If there is an overage above $50, the borrower can be refunded that money. The servicer will alter the monthly payment lower for the next year.

If there is a shortage, the mortgage servicer will modify your monthly payment to account for both the shortage in the last year and the increased cost for the upcoming year.

If your account is current, you’ll receive a refund check if the overage amount is $50 or more. If the overage is less than $50, the mortgage servicer will apply that amount to your payment.

If you have a remaining balance in your escrow account after you pay off your mortgage, you will be eligible for an escrow refund of the remaining balance. Servicers should return the remaining balance of your escrow account within 20 days after you pay off your mortgage in full.

If you are able to switch up your homeowners insurance for a better rate, then you might be eligible for an escrow refund. When switching homeowners insurance policies, you’ll want to contact your servicer. They’ll need to know about your new policy.

If you made a larger than necessary upfront payment at closing, then you may receive an escrow refund.

If there is surplus in the escrow account after you finish paying off the loan, you will be entitled to an escrow refund regardless of the amount.

Notify your mortgage lender when switching insurance providers

It is important to notify your mortgage lender when switching insurance providers to avoid any issues with your payments and coverage. Here are some detailed steps to guide you through the process:

• Shop for a new policy: Compare different insurance providers and their quotes to find the best deal that meets your coverage needs. Consider factors such as price, discounts, service quality, and additional coverage options.
• Apply for new insurance: Once you've selected a new insurance company, complete the application process by providing relevant information, such as your personal details, home details, security features, and any special items that need separate insurance.
• Make the switch: Before cancelling your old policy, ensure that your new policy is processed and will take effect. This will help you avoid a lapse in coverage, which can lead to denied claims and problems with your mortgage lender.
• Notify your existing insurance company: Contact your current insurance company or agent to inform them of the cancellation. Provide the cancellation date and follow any necessary procedures, such as signing an authorization form.
• Contact your mortgage lender: Inform your mortgage company about the change in insurance providers. Provide them with the necessary details, such as the name and address of the new insurance company, your mortgage loan number, and your new policy number. This step is crucial to ensure that your lender has the correct information for making payments and handling your account.
• Handle escrow and refunds: If you have an escrow account with your mortgage lender, ensure that there are sufficient funds to cover the new insurance policy, especially if you are switching mid-term. If you receive a refund from your previous insurance company, redirect it to your new escrow account to avoid an escrow shortage that could increase your mortgage payments.

By following these steps, you can ensure a smooth transition to your new insurance provider while maintaining a good relationship with your mortgage lender.

Frequently asked questions