When you purchase a home with a mortgage, your mortgage lender may establish an escrow account. Once your loan has closed, you will begin your regular payments and working with a mortgage servicer like RoundPoint. Each month, a portion of your loan payment is deposited into this account to pay for some property-related expenses (like property taxes). For many homeowners, this typically becomes a routine part of their monthly payment and may help ease the stress of planning and managing larger payments on their own.
Escrow is an important piece of a mortgage loan, but what is it and how does it work? Keep reading to better understand escrow accounts.
Escrow Account Basics
What is an escrow account?
A mortgage escrow account is a separate account established by your mortgage servicer to pay certain property-related expenses on your behalf. Instead of paying these bills directly, a portion of your monthly mortgage payment is allocated to your escrow account, then the mortgage servicer pays the bills as they come due.
Escrow accounts generally cover:
- Property taxes,
- Homeowners insurance,
- Flood insurance, if required, and/or
- Any required mortgage insurance (as applicable). This may include private mortgage insurance (PMI) for conventional loans or mortgage insurance premiums (MIP) for FHA loans.
How does an escrow account work?
Each month, you pay your monthly mortgage bill, but do you truly know the breakdown of your payment? Many accounts generally include four main components:
- Principal: The amount applied to your loan balance;
- Interest: The cost of borrowing (based on your interest rate);
- Taxes: Property taxes (held in escrow);
- Insurance: Homeowners insurance (held in escrow).
This is frequently referred to as PITI (Principal, Interest, Taxes, Insurance). Your monthly tax and insurance amounts are often calculated in the following manner:
- Your mortgage servicer estimates your annual tax and insurance costs.
Note: Your mortgage servicer estimates your annual tax and insurance costs by comparing the actual and projected costs from the previous year. Depending on the state where your property is located, an additional cushion may also be factored into this calculation to protect against unexpected increases.
- Your mortgage servicer divides the total amount by 12 to determine your monthly amount.
- The calculated monthly amount is added to your monthly mortgage payment.
- When you make your monthly mortgage payment each month, your mortgage servicer deposits the escrow portion of your payment into your escrow account.
- When your tax and insurance bills are due, your mortgage servicer pays them from your escrow account.
Am I required to have an escrow account?
Whether you are required to have an escrow account depends on many factors and, although they are not always required, there are often instances where many mortgage lenders and servicers may require one. The most common scenarios are typically when your down payment was less than 20% or you have an FHA, VA, or other government-backed loan.
It is important to remember that if you do not have an escrow account, you are responsible for managing, budgeting for, and making these payments on time to avoid late fees and/or lapses in coverage.
What is not covered by an escrow account?
While escrow accounts handle many important property-related costs, it is important to remain mindful there are components that are not covered. Mortgage escrow accounts generally do not include home maintenance or repair costs and any utilities like water, sewer, trash, electric, cable, phone, or internet.
Escrow Account Advantages
What are the advantages of an escrow account?
Escrow accounts often offer homeowners peace of mind by simplifying payment management for critical expenses. They may also significantly decrease the potential risks associated with missing these essential payments.
- Convenience: No need to track large tax and insurance bills.
- Budgeting: By spreading these significant expenses across 12 months, tackling these costs often becomes more manageable.
- Reduced risk: Dependable, on-time payments mean you never have to worry about the ramifications of late or missed payments (like additional fees, liens, or loss of coverage).
Escrow Account Removal
Can I remove my escrow account?
You may potentially be able to remove your escrow account if you meet specific criteria set by your mortgage servicer. To be considered eligible to remove your escrow account, you typically need to meet, at a minimum, the following conditions:
- Equity: You have at least 20% equity in your home.
- Loan history: Your mortgage should generally be at least one year old and you should have a strong payment history with no late payments during this time.
- No upcoming payments: There should be no property taxes or insurance payments due within the next 30 days.
You can contact your mortgage servicer to discuss removal eligibility. They can provide you with additional information and any necessary forms that require completion. Once you formally submit your request, your mortgage servicer will review your request and notify you of their decision. For a complete list of requirements, refer to the Escrow Waiver/Removal Request Form.
If you are a RoundPoint customer interested in removing escrow from your account, download, complete, and submit the Escrow Waiver/Removal Request Form.
Escrow Analysis, Shortage, & Surplus
What is an escrow analysis?
Every year, your mortgage servicer will assess your escrow account to ensure the necessary amount of money is being collected for anticipated tax and insurance expenses. This review is called an escrow analysis.
By conducting this annual escrow analysis, mortgage servicers identify any changes in property taxes, increases in insurance premiums, and any account shortages or surpluses.
You may receive a statement containing escrow analysis results indicating an analysis was recently performed on your account and should contact your servicer with any questions.
What is an escrow shortage?
An escrow shortage means there are insufficient funds in your escrow account to pay for increased tax or insurance costs, resulting in a shortfall in the balance required to pay these bills and maintain the account. When this happens, you will have two options: pay the difference in a lump sum or spread the shortage amount over a designated number of months.
If you choose to remedy the shortage by paying via lump sum, keep in mind your monthly payment may still increase, as the shortage only accounts for the existing deficiency and not future property taxes and insurance costs.
What is an escrow surplus?
An escrow surplus (or an overage) means when your escrow account holds more money than required for the property taxes and insurance bills. This typically occurs when costs decrease or were overestimated during the last escrow analysis. When a surplus is present, typically, a refund check is sent to you.
Escrow Accounts & Your Monthly Payment
Will my monthly mortgage payment be impacted by my escrow account?
Your monthly mortgage payment may fluctuate throughout the life of your loan due to escrow changes. Depending on your loan type, the principal and interest portion of your payment may remain the same, however, the tax and insurance component will likely change. In fact, tax and insurance costs generally increase on an annual basis, which means your payment amount will increase to ensure your escrow account is adequately maintained and funded.
In addition to standard rising costs, you may also experience an increase in your monthly payment if the last escrow analysis resulted in a shortage.
Accessing Escrow Account Details
How do I access my escrow account information?
Your escrow account details can be reviewed in a variety of ways:
- Billing statement: Your standard monthly billing statement typically includes pertinent escrow account details, like your current escrow account balance as well as a breakdown of how your payment is allocated each month.
- Escrow analysis statement: This statement generally includes account-specific details pertaining to historical transactions, projected future amounts for property taxes and insurance, and any required adjustments made to your monthly mortgage payment as a result of the annual escrow analysis.
- Online account: If your mortgage servicer has an online portal, you can register your account to have access to your many of your account details and documents, including the aforementioned statements. For RoundPoint customers, you can register for or access your account here.
Most generic questions regarding billing, statements, and breakdowns may be answered by your mortgage servicer. If you have questions about increased property taxes or insurance premiums, contact your local tax office or insurance company, respectively.
