Understanding Escrow

What is escrow? How does it work? What is an escrow account? Do you need one? You’ve got questions; we’ve got answers.

Unless you have a mortgage loan, “escrow” is a word you may not be familiar with. But in the mortgage world, you hear a lot about it. Thankfully, escrow is not hard to explain—or understand. So let’s dive In and answer the most common questions that homeowners ask us about escrow:

1. What is “escrow”?

Escrow is a legal agreement where someone holds something of value (often money) for you until specific conditions are met; then they release the money to meet whatever need you set it aside for.

There are two kinds of escrow in the mortgage business:

Loan-servicing escrow. This is the kind of escrow explained in this article; it’s a long-term holding account that we maintain for you. Whenever you make a mortgage payment, we deposit part of your payment into your escrow account to cover your property-tax and homeowner-insurance bills—which we pay for most of our homeowners.

Loan-origination escrow. That kind of escrow is when a neutral third party—such as an attorney or a title company—holds the non-refundable earnest-money (or “good faith”) deposit that you offer the seller of the home you’re buying. That kind of escrow is not covered in this article.

2. What is an “escrow account”? How does it work?

As noted above, an escrow account (sometimes called an “impound” account) is a type of holding (or, savings) account that was set up during your mortgage closing; your loan servicer (Shellpoint) manages it for you. Unless you happened to put more than 20% down when you bought your house, your mortgage probably has an escrow account. (Most of the mortgages we manage have one.)

An escrow account is like a savings account, but only we can make withdrawals from it. We deposit part of every mortgage payment you make into your account to cover the estimated costs of your property taxes and homeowner’s insurance premiums. Then when those bills come due, we pay them for you out of the funds in your account.

In some states, other property-related expenses (such HOA fees or private mortgage insurance premiums) may also be paid from your escrow account. Your mortgage contract describes the details of what’s included in your account.

3. What are the benefits of having an escrow account?

An escrow account provides you with some practical benefits:

• Automatic saving. You don’t have to save up to pay your property tax and homeowner’s insurance bills, because those amounts are included in your regular mortgage payment.
• Easy budgeting. Having an escrow account breaks up big tax and insurance bills into smaller amounts that you pay throughout the year—whenever you make a mortgage payment.
• More convenience. You never have to worry about due dates for your tax and insurance bills—or the penalties of paying late. Whenever those bills come due, we use the funds in your escrow account to pay them for you.

4. Do I need to send you my tax and insurance bills?

No. Your local property-tax office and your homeowner’s insurance company send us copies of your bills. If we should ever need you to send us anything, we’ll let you know by mail.

5. What is “escrow analysis”?

Because taxes, insurance premiums, and other fees can change, the amount you need to pay into your escrow account to cover those bills can also change. To help ensure you have enough money in your account for us to pay those bills, we analyze your account at least once a year—based on the state in which your property is located (see the table below).

During an escrow analysis, we’ll review your property tax and insurance bills and compare them to the amount of money currently being held in your escrow account. If there is a shortfall, we will adjust your monthly mortgage payment to ensure that enough money is being set aside in the escrow account to cover these expenses.

An escrow analysis can result in either an increase or a decrease in your monthly mortgage payment, depending on the outcome of the analysis. If your property taxes or insurance rates have increased, your monthly payment may need to be adjusted to cover the additional costs. On the other hand, if these expenses have decreased, you may see a reduction in your monthly mortgage payment.

After we finish our analysis, we tell you about it—and about any resulting change in your mortgage payment—by emailing you a personalized video. Then we follow up (about 10 days later) by mailing you a detailed letter.

6. Why did my payment change?

There are several escrow-related reasons that can cause your payment to change:

• Changes in taxes or insurance premiums. These are the most common reasons for a change in your payment. Although taxes and insurance costs can decrease, they usually increase.
• ARM adjustment. If you have an adjustable-rate mortgage (ARM), your payment may have changed as a result of us recalculating your interest rate.
• Escrow shortage. Our analysis may have determined that your account did not have enough funds in it (a “shortage”). We make up for the shortage by increasing your payment amount.

7. Why would my escrow account have a shortage?

To help cover unexpected increases in your taxes or insurance premiums, we maintain a “cushion” (minimum balance) in your account. The cushion is equal to no more than two months of escrow payments. Despite the cushion, there are still some reasons why your account may have a shortage:

• Unexpected cost increases. Your property taxes or insurance premiums may have increased more than we expected (this is the main reason for escrow shortages). That’s because the amounts we use to analyze your escrow account for next year’s tax and insurance bills are estimates, based on your previous year’s bills. We try very hard to use accurate estimates, but sometimes your final bills simply amount to more than we anticipated.
• Due date change. The due date of your insurance or tax bills may have changed.
• Insufficient deposits. Less than we expected may have been deposited into your account.
• Unexpectedly high payouts. We may have paid out more from your account during the previous year than we expected.

8. I have an escrow surplus. When will I get my surplus check?

Sometimes we end up depositing more money in your escrow account than we need to pay your tax and insurance bills and maintain your cushion. Beyond those amounts, If you have an escrow surplus of more than $50, we’re required by law to return those funds to you—which we do by mailing you a check along with your escrow-analysis letter.

9. My payment has changed. What do I need to do?

The answer to this question depends on how you pay:

• If you pay by autodraft, you don’t need to do anything—we’ll automatically deduct the new amount from your bank account. Learn more about the benefits of autodraft.
• If you use an online bill-pay system, update your settings for your new payment amount.
• If you pay by check or money order, make out your check or money order for the new amount—and mail it so it arrives in our office before 3 p.m. Eastern Time on the due date.

10. Can I earn interest on the funds in my escrow account?

Possibly. Only 15 states require interest to be paid on escrow accounts: Alaska, California, Connecticut, Iowa, Maine, Maryland, Massachusetts, Minnesota, New Hampshire, New York, Oregon, Rhode Island, Utah, Vermont, and Wisconsin. But even in those states, there can be exceptions.

We’re careful to follow every state and local law related to paying interest on escrow-account funds. If you live in one of the 15 states where interest is paid on escrow accounts, get advice from your financial advisor or real estate attorney.

11. What if there’s a mistake in my escrow account?

Call us. It’s possible (although rare) to have a problem with your escrow account. If you believe there’s an error—or if you believe your tax or insurance bill was not properly paid—call us immediately at 800-365-7107. We’ll work closely with you to help you find a solution to any problem you may encounter.

Here are a few things to watch for:

• Learn about how property taxes work in your area; your local tax authority’s website should publish tax rates, answer basic questions, and provide contact information for your local tax assessor’s office.
• Be aware of your tax and insurance bills and due dates, even though you’re not paying those bills yourself. If you ever receive a notice of non-payment, call us immediately.
• Monitor your escrow account and view your most recent escrow statement on our website. Sign in with your Username and Password, and click on your Loan ID. Then click on Mortgage Assistance, select Available Documents, and choose MG-Escrow.

12. Are the property taxes you hold in escrow for me tax-deductible?

Yes. Property taxes are deductible, but be sure to work with your tax advisor to learn the details. Also, be sure not to make the mistake of deducting the amount we deposited into your escrow account—only the actual tax amount we paid is deductible.

Remember: While we deposit part of every mortgage payment you make into your escrow account, we don’t pay your taxes until the bill comes due—which may be once or several times a year, depending on your local tax authority. As part of your annual escrow analysis, we always tell you the actual amount we paid. You can also see the amount we paid for property taxes by checking the IRS Form 1098 (Mortgage Interest Statement) that we create for you every year.

To review your most recent escrow statement on our website, sign in with your Username and Password and click on your Loan ID. Then click on Mortgage Assistance, select Available Documents, and choose MG-Escrow.

13. Are there any significant advantages to not having an escrow account?

Not really. Many mortgage agreements require an escrow account, so those homeowners cannot cancel their accounts (see below for more about escrow-account requirements).

If they’re not required to, some homeowners choose not to have an escrow account. For example, if you put 20% or more down when you bought your property and you got a non-FHA mortgage, you may not have been required to set up an escrow account. If that’s the case for you, be sure to plan ahead and manage your money well, so you can pay your tax and insurance bills on time.

If your income varies—for example, if you’re self-employed—you may prefer to set aside tax and insurance funds in bigger chunks during months when you make more money (instead of setting aside the same amount every month). So an escrow account may not be the best solution for you.

It’s worth noting that many people who aren’t required to have an escrow account have one anyway. That’s because it’s an easy and convenient way to pay your tax and insurance bills.

14. Can I cancel my escrow account?

Possibly. If your loan type and mortgage agreement allow it, you can ask us to cancel your escrow account. Please do that in writing by logging onto your account on our website and then visiting the Contact Us section. We’ll review your request in light of your loan type, your mortgage agreement, and all applicable regulations; and we’ll respond to your request within 30 days.

But before you ask us to cancel your account, please note that we cannot cancel it if your payment history shows fewer than 12 consecutive months of on-time payments. Also, many homeowners are not allowed to cancel their escrow account for any reason. For others, canceling may be an option if their loan meets certain requirements. Here’s a general overview:

• Federal Housing Administration (FHA) loans—escrow account always required. Do you have an FHA loan? If so, you must have an escrow account. The FHA requires lenders who make FHA-insured loans to set up non-cancelable escrow accounts for those homeowners.
• Veterans Administration (VA) loans—usually required. The VA doesn’t require escrow accounts for VA-guaranteed home mortgages. But the VA does require lenders to make sure that your property taxes are paid and your home always has enough insurance. As a result, lenders often set up escrow accounts to help meet those requirements. In general, you’ll need to have at least 10% equity in your home and a solid credit score to cancel an escrow account on a VA loan.
• “Higher-priced” loans—required for at least five years. Some lenders require an escrow account for at least the first five years if you have an HPML—a “higher-priced mortgage loan”—which has a higher-than-average annual percentage rate (APR). So if it’s been five years since you closed on your HPML and you’ve built up at least 22% equity in your home, you may be allowed to cancel your escrow account.
• Conventional loans—often required. With a conventional mortgage, your lender decides whether or not to require an escrow account. For many conventional loans, if you made a down payment of 20% or more, your lender was probably able to waive the escrow requirement at closing if you requested it (but they may have required you to pay an escrow-waiver fee).

Many lenders are also willing to cancel your escrow account after you build up enough equity (a 20-25% minimum) in your property. But if you cancel your escrow account and then don't pay the taxes and insurance, your mortgage agreement allows us to reinstate your account.

15. What else should I consider before trying to cancel my escrow account?

Canceling your escrow account is not something you should do on a whim. So before you submit your request, stop and think:

• Do you want to give up the convenience? One of the best benefits of an escrow account is convenience. When we maintain your account, we take full responsibility for paying your tax and insurance bills. That means two less bills for you to pay—and you’ll never have to worry about paying late fees.
• Can you save up the money you’ll need? If saving money is difficult for you, you may not want to cancel your account. An escrow account makes it easy to gradually put aside the money that’s needed to pay your tax and insurance bills. To learn more about using a budget to manage your money and save for the future, check out this helpful article.
• Do you really want to pay your tax and insurance bills yourself? If you cancel your account, you’ll be directly responsible for paying your property taxes, home-insurance bills, and any other mortgage-related expenses that we pay out of your account. And if you don’t pay by the due dates, you’ll also have to pay late fees. So if you’re serious about canceling, be sure to get serious about setting up reminders, planning ahead, and saving up the funds you’ll need to pay those bills on time and in full.
• Are you prepared to face the consequences of non-payment? If you don't pay your tax and insurance bills, we’re required to step in and pay your taxes for you. We’ll also be forced to buy homeowner’s insurance coverage on your behalf—which is usually much more expensive than buying it yourself. Then you'll have to repay those amounts. Otherwise, your mortgage could go into default—and you could end up facing foreclosure.

Hopefully, this Q&A article has helped you gain a better understanding of escrow and escrow accounts. If you still have questions about escrow, our Customer Care Team welcomes your call at 800-365-7107.