You must first complete Mortgage Escrow Accounts – Introduction before viewing this Lesson
Reading Time: 13 minutes

Documents you sign, or deposits you make in regards to your mortgage, go into an escrow account and are held by a third party. The items are released from escrow when certain conditions are met. Money held in escrow is usually designated for property taxes, earnest money deposits, hazard insurance, etc.

What is an escrow or impound account?

An escrow account, sometimes called an impound account depending on where you live, is set up by your mortgage lender to pay certain property-related expenses.

The money that goes into the account comes from a portion of your monthly mortgage payment. An escrow account helps you pay these expenses because you send money through your lender or servicer, every month, instead of having to pay a big bill once or twice a year.

Many lenders require that you pay your taxes and insurance using escrow, so they can make sure that the bill gets paid. Your mortgage servicer will manage the escrow account and pay these bills on your behalf. Sometimes, escrow accounts may also be required by law.

Your property taxes and insurance premiums can change from year to year. Your escrow payment—and  with it, your total monthly payment will change accordingly.

In addition, if you fail to pay your taxes or insurance, your lender may:

  • Add the amounts to your loan balance
  • Add an escrow account to your loan
  • Purchase new homeowners insurance for you and bill you for it. This lender-purchased insurance, known as force-placed insurance, is typically more expensive than homeowners insurance you pay on your own.

    What can I do if my mortgage lender or servicer is charging me for force-placed homeowner’s insurance?

    Make sure you have your own homeowner’s insurance and send proof to your mortgage servicer.

    If you don’t have homeowner’s insurance, or don’t have enough homeowner’s insurance, or your homeowner’s insurance has lapsed, here are steps you can take:

    1. Contact your insurance carrier as soon as possible and get a new insurance policy or ask to have your old policy reinstated. If you don’t do this, you may have to pay for costly force-placed homeowner’s insurance if you’re not otherwise covered.
    2. Once you have a new or reinstated homeowner’s insurance policy in place, send proof of the policy and any other information that your mortgage servicer has requested to your mortgage servicer. Request that your mortgage servicer cancel the force-placed insurance policy it obtained for you as soon as possible.
    3. If you disagree with an action your mortgage servicer took with your insurance, you can send a notice of error, which is a letter to your mortgage servicer saying that there was an error and disputing the error.

    Your servicer may require force-placed insurance when you do not have your own insurance policy or if your own policy doesn’t meet the requirements of your mortgage contract. In many instances, this insurance protects only the lender, not you. The servicer will charge you for the insurance. Force-placed insurance is usually more expensive than finding an insurance policy yourself.

     

Even if your lender does not require an escrow account, consider requesting one voluntarily. An escrow account makes it easier to budget for your large property-related bills by paying small amounts with each mortgage payment. That way you don’t have to scramble to pay a large property tax bill or insurance premium when it comes due.

 

Why did my monthly mortgage payment go up or change?

Several things can cause your mortgage payment to change. Check your mortgage statement or contact your servicer and ask them to explain.

There are several reasons why your monthly mortgage payment may have changed. Some examples include:

  1. You have an adjustable rate mortgage (ARM) and the interest rate changed. Check the type of mortgage you have. Some homeowners believe that they have a fixed-rate mortgage loan, when their loan actually includes an adjustable-rate or some other feature that can cause their interest rate and payment to change.
  2. You have an interest-only or pay-option loan and you are starting to pay principal. With these loans, you can postpone making principal payments for a while. That means that for a period of time you are only paying off the interest that’s accumulating on the amount you borrowed to pay for your home. Eventually, you have to start paying principal, or the actual amount you owe on the home, and that will make the monthly payments go up.
  3. You have an escrow account to pay for property taxes or homeowners insurance premiums, and your property taxes or homeowners insurance premiums went up. Check your monthly mortgage statement. If your monthly mortgage payment includes the amount you have to pay into your escrow account, then your payment will also go up if your taxes or premiums go up. Learn more about escrow payments. 
  4. You have a decrease in your interest rate or your escrow payments. It could also be because you stopped paying for private mortgage insurance. If you have private mortgage insurance, your payments may change once you are able to and do cancel the insurance.
  5. You were charged new fees. Your servicer may have charged you fees that increased your monthly payment. Check your monthly mortgage statement or any correspondence you recently received from your lender or servicer.
  6. It’s also possible that your mortgage servicer simply made a mistake. If you think your servicer made a mistake, first call your servicer to check. While on the phone, explain the situation to the servicer. Ask for a corrected statement. Also, ask for a reference number and the name of the person you are talking to, and take detailed notes on what you talked about and the date of the call, so you can keep track for your records.  If your servicer doesn’t fix the problem over the phone, send a notice of error to your servicer explaining why you think it made a mistake in calculating your loan payment. Make sure you send the notice to the address your servicer uses for errors and information requests. This address should be listed on your statement or the servicer’s website – it might be different from the address where you send your payments.

If you still don’t understand why your payment changed, you should call your mortgage servicer, and you may also want to send an information request.

Tip: Use this checklist to see what steps you can take to make sure your mortgage is on the right track.
[pdf-embedder url=”https://www.getreti.com/wp-content/uploads/2019/03/cfpb_mortgage-payment_checklist.pdf”]

How do I tell if I have a fixed or adjustable rate mortgage?

There are several ways to tell if you have a fixed or adjustable rate mortgage.

1. Call your servicer.

Your servicer is the company that you send your mortgage payments to each month. Their phone number may be listed on your monthly mortgage statement or payment coupons.

2. Check the disclosures that you received when you got your loan

If you applied for your mortgage after October 3, 2015:

Look at your Closing Disclosure. The type of interest rate is listed at the top of page 1. See a sample Closing Disclosure.

What is a Closing Disclosure?

A Closing Disclosure is a five-page form that provides final details about the mortgage loan you have selected. It includes the loan terms, your projected monthly payments, and how much you will pay in fees and other costs to get your mortgage (closing costs).

The lender is required to give you the Closing Disclosure at least three business days before you close on the mortgage loan. This three-day window allows you time to compare your final terms and costs to those estimated in the Loan Estimate that you previously received from the lender. The three days also gives you time to ask your lender any questions before you go to the closing table.

See a sample Closing Disclosure form with interactive tips and definitions.

Note: You won’t receive a Closing Disclosure if you’re applying for a reverse mortgage. For those loans, you will receive two forms-a HUD-1 Settlement Statement and a final Truth in Lending Disclosure—instead of the Closing Disclosure. If you are applying for a HELOC, a manufactured housing loan that is not secured by real estate, or a loan through certain types of homebuyer assistance programs, you will not receive a HUD-1 or a Closing Disclosure, but you should receive a Truth-in-Lending disclosure.

What is a Loan Estimate?

A Loan Estimate is a three-page form that you receive after applying for a mortgage.

The Loan Estimate tells you important details about the loan you have requested. The lender must provide you a Loan Estimate within three business days of receiving your application.

The Loan Estimate is a form that took effect on Oct. 3, 2015.

The form provides you with important information, including the estimated interest rate, monthly payment, and total closing costs for the loan. The Loan Estimate also gives you information about the estimated costs of taxes and insurance, and how the interest rate and payments may change in the future. In addition, the form indicates if the loan has special features that you will want to be aware of, like penalties for paying off the loan early (a prepayment penalty) or increases to the mortgage loan balance even if payments are made on time (negative amortization). If your loan has a negative amortization feature, it appears in the description of the loan product.

The form uses clear language and design to help you better understand the terms of the mortgage loan you’ve applied for. All lenders are required to use the same standard Loan Estimate form. This makes it easier for you to compare mortgage loans so that you can choose the one that is right for you.

When you receive a Loan Estimate, the lender has not yet approved or denied your loan application. The Loan Estimate shows you what loan terms the lender expects to offer if you decide to move forward. If you decide to move forward, the lender will ask you for additional financial information.

See a sample Loan Estimate form with interactive tips and definitions.

Note: You won’t receive a Loan Estimate if you’re applying for a reverse mortgageFor those loans, you will receive two forms — a Good Faith Estimate (GFE) and an initial Truth-in-Lending disclosure — instead of a Loan Estimate. If you are applying for a HELOC, a manufactured housing loan that is not secured by real estate, or a loan through certain types of homebuyer assistance programs, you will not receive a GFE or a Loan Estimate, but you should receive a Truth-in-Lending disclosure.

Look at your Truth in Lending Disclosure statement. Look for language along these lines: “Your loan contains a variable-rate feature. Disclosures about the variable-rate feature have been provided to you earlier.” If similar language is on the disclosure, you have an adjustable rate mortgage.

3. Check the papers that you signed at closing

Look at the paper that says “Promissory Note” or “Note.”

If you have an adjustable rate mortgage, your note may have the words “Adjustable Rate Note” and may include language similar to: “The interest rate I will pay will change in accordance with Section __ of this Note.”

What is a Truth-in-Lending disclosure for a mortgage loan?

A Truth-in-Lending Disclosure Statement provides information about the costs of your credit.

Effective October 3, 2015, for most kinds of mortgage loans a form called the Loan Estimate replaced the initial Truth-in-Lending disclosure, and a Closing Disclosure replaced the final Truth-in-Lending disclosure.

If you applied for a mortgage before October 3, 2015, or if you are applying for a reverse mortgage, a HELOC, a manufactured housing loan that is not secured by real estate, or a loan through certain types of homebuyer assistance programs, you should receive a Truth-in-Lending disclosure.

You receive a Truth-in-Lending disclosure twice: an initial disclosure when you apply for a mortgage loan, and a final disclosure before closing. Your Truth-in-Lending form includes information about the cost of your mortgage loan, including your annual percentage rate (APR).

What fees or charges are paid when closing on a mortgage and who pays them?

When you are buying a home you generally pay all of the costs associated with that transaction. However, depending on the contract or state law, the seller may end up paying for some of these costs.

Even if you don’t pay the mortgage closing fees directly out of pocket, you might end up paying them indirectly. Sometimes, you can negotiate with the seller for a “credit” towards your closing costs, but the seller will usually require you to pay a higher price for the home in order to cover the costs of this credit.

You’re still paying for these costs—they are just paid through your loan instead of paid out of pocket. The lender may also offer to give you a credit to help with your closing costs. This credit isn’t free either. Typically, the lender will either increase your loan amount to cover these costs, or charge you a higher interest rate in exchange for the credit.

Common closing fees or charges may include:

  • Appraisal fees
  • Tax service provider fees
  • Title insurance
  • Government taxes
  • Prepaid expenses such as property taxes, homeowners insurance, and interest until your first payment is due

The following is sponsored by Wells Fargo

This is NOT an endorsement.

What is escrow?

It’s an easy way to manage property taxes and insurance premiums for your home. You don’t have to save for them separately because you make one monthly payment where:

  • Part goes toward your mortgage to pay your principal and interest.
  • The other part goes into your escrow account for property taxes and insurance premiums (like homeowners insurance, mortgage insurance, or flood insurance).

When those bills are due, we use the funds in your escrow account to pay them. Watch our videos to learn how escrow works.

Yearly escrow review

Property taxes and insurance premiums change over time. We review your escrow account each year to make sure you’ll have enough to cover these expenses. To help with any unexpected increases, you need to keep a minimum balance in your account at all times. It’s calculated to not be more than 2 months of escrow payments.

During the escrow account review, we figure out how much will be in your account each month for the next 12 months. At its lowest point, if it’s projected to be:

Escrow Shortage

If the money in your escrow account is projected to be below your minimum balance at its lowest point in the 12-month period, you have a shortage. This can happen if the taxes or insurance premiums for the previous 12 months were more than expected. Or, if they’re estimated to go up in the next 12 months.

You can make up a shortage in 1 of 2 ways:

  • Pay it in full. Send a check for the full shortage amount and we’ll put it in your escrow account. Instructions for sending your payment are included with your Escrow Review Statement.
  • Pay it over 12 months. We’ll add a portion of the shortage amount to your monthly payment.

 

Graph showing a shortage as any amount under the required minimum balance and an overage as any amount above the required minimum balance.

Escrow Overage

If your escrow account is projected to have more than the minimum balance required at its lowest point in the 12-month period, you have an overage. This happens if the taxes or insurance premiums for the previous 12 months were less than expected. Or, if they’re estimated to go down in the next 12 months. In most cases, we’ll send you a refund check for that amount.

Graph showing a shortage as any amount under the required minimum balance and an overage as any amount above the required minimum balance.

 

We review your escrow account every year. After each review, we send you a statement that details any changes to your account, any shortages or overages you may have, and your account activity

Image of an escrow review statement.

 

This section gives you a quick recap of what we found when we reviewed your account. It’ll tell you if your payment amount is changing and if you have a shortage or an overage. You’ll find more information about these in the rest of the statement.

Image showing the first section of the escrow review statement which tells you if your payment amount is changing and if you have an overage or a shortage.

Part 1 of your escrow statement has your payment information. It has your current payment amount and your new payment amount.

If you have a shortage

If you have a shortage, you’ll see two options for paying it. Option 1 is to pay the shortage over 12 months by having a portion added to each monthly payment. Option 2 is to pay your shortage in full.

Image of Part 1 of an escrow review statement for shortages.

If you have an overage

In most cases, if you have an overage you’ll have a refund check attached to the bottom of this section.Image of Part 1 of an escrow review statement for overages.

Payment Calculations

This section shows you two things. The first is exactly how we calculated your escrow payment amount. You’ll see your estimated taxes, insurance, and other escrow-related items for the coming year and how much they’ll cost monthly.

Image showing Part 2 of the escrow review statement which tells you how we calculated your payment.

The second is how we calculated your overage or shortage amount.

Image showing Part 2 of the escrow review statement which tells you how we calculated your overage or shortage amount.

Escrow Account Projections

This is a breakdown of what we expect to pay out of your escrow account over the next 12 months. You’ll also find information on how much we expect to be in your account after each bill is paid.

Image showing Part 3 of your escrow review statement.

Escrow Account History

Part 4 shows you exactly how much you put into your escrow account over the past year and how much we paid out of it.Image showing Part 4 of your escrow review statement.

Escrow Accounts

What’s an escrow account?

An account you fund each month as part of your total monthly payment. We use it to make property tax and insurance payments for you. Items like mortgage insurance and flood insurance may also get paid from the account.

Why am I required to have an escrow account?

Most of the time, escrow accounts are required if your down payment was less than 20%. There are benefits to having an escrow account, even if it isn’t required. It helps you manage large expenses like property taxes and insurance premiums so you don’t have to save for them separately. You make 1 combined mortgage and escrow payment each month and we deposit a portion into your escrow account. When your property tax and insurance bills are due, we pay them on your behalf.

What’s a minimum balance?

Sometimes taxes and insurance are higher than expected. To be prepared, you’re required to keep a minimum balance in your account at all times. This helps make sure any unexpected increases are covered. Your minimum balance varies by state but is calculated to not be more than 2 months of escrow payments.

Escrow payments

What bills are paid from an escrow account?

The money in your escrow account pays:

  • Property taxes
  • Homeowners insurance
  • Mortgage insurance (if it’s required)
  • Flood insurance (if it’s required)It doesn’t pay:
    • Interim tax bills, special or added tax assessments, or any other fees that are not included in your property tax bill
    • Homeowners association fees
    • Premiums for non-required insurance policies, such as separate personal property insurance
    • Supplemental tax bills, except in California

    You’ll pay these separately.

How is my escrow amount determined?

  • Estimate how much your taxes and insurance will cost over the next 12 months. We base this on your loan closing documents, taxing authority, and insurance company.
  • Divide that by 12 and add it to your monthly mortgage payment.
  • Determine if your account keeps the minimum balance required throughout the year or if your payment needs to be adjusted so your account stays balanced.