Escrow

Before you rely on it

What to check

Read the escrow analysis when it arrives. It states the shortage and how many months they plan to collect it over.

The common error

Where people go wrong with escrow

Blaming the lender for a payment increase. The lender did not raise anything. The assessor did, and the servicer is passing it through with a catch-up attached.

Worked through

Escrow in plain numbers

A homeowner pays $4,800 a year in property taxes and $1,200 a year for insurance; the lender collects one twelfth of the total each month, $500, into an escrow account and pays the bills when due. Suppose taxes rise by 10%, or $480 a year. The account runs short, and the lender recalculates. The monthly escrow rises by $40, and there may be a shortage to make up, spread over the next year. So a fixed-rate mortgage payment can still change. The principal and interest part stays the same while the escrow part follows tax and insurance costs.

Easily confused

Escrow and its neighbours

Escrow in a home loan is not the same as escrow in a purchase. During a sale, an escrow agent holds money and documents until conditions are met. In a mortgage, the servicer holds your money for taxes and insurance, and both involve a neutral party holding funds, but the purposes differ. Escrow is also not a security deposit. It is your money, paid toward bills that will come due, and any surplus is returned or credited, according to the rules that apply.

In real decisions

Where escrow turns up

Most mortgages with low down payments require escrow, and many lenders offer it otherwise; it spreads large bills across the year and protects the lender's interest in the property by making sure taxes and insurance are paid. Borrowers watch the annual escrow statement to see changes. Shortages, surpluses and the cushion the lender holds are all explained there. When comparing housing costs, include the escrow portion in the monthly payment, since principal and interest alone understate it.

Know the edges

Where escrow stops being reliable

Escrow changes with tax assessments and insurance premiums, so the payment is not fixed. Errors happen: a bill paid late or to the wrong party; lenders may hold a cushion within limits set by rules, and some borrowers prefer to pay taxes and insurance directly to manage cash flow and earn interest, if the lender allows it. Review each annual statement, check the assessed value and shop for insurance to keep the total under control.

Quick answers

What people ask about escrow

Why did my escrow payment go up? Property taxes or insurance premiums rose, or a shortage from the last year is being repaid. Your servicer sends an annual analysis explaining the change. Compare it with your tax and insurance bills.