Have you ever wondered how your escrow account on your mortgage works? These things can be pretty confusing sometimes and difficult to understand. Every month, you pay 1/12 of your yearly tax and insurance bills, when you make your mortgage payment to your lender. Also included in that payment is any extra bit of money the lender requires to be held in reserve. Therefore, if the annual amount happens to be $4,800 your monthly payment would be $400.
Escrow Overcharges
It is a requirement of the law that during the course of the year, you should have no more than 1/6 of the total tax and insurance bills, for one month out of the year. To get a better understanding of this lets look at an example. If your annual total is $4,800 the requirement states that one month out of the year the account can have no more than $800. When you get your monthly statement and you believe for some reason that you are paying more in escrow than you should, simply call you lender to discuss the matter. They should be able to do an escrow analysis which will let you know how much you should be paying or to notify you that the amount you are paying is in fact correct. If you are unable to resolve the differences contact the attorney general office for your state.
Avoid paying escrow
You can stop paying escrow altogether if you have paid off at least 20% of your mortgage and you haven’t been late with a payment. Different mortgage companies will have different policies and procedures concerning this requirement. Right at the beginning when you first get your mortgage loan the best way to avoid escrow is to put down 20% of the purchase price and you have a stellar credit history.
If you don’t have an escrow account then you must pay you taxes and insurance yourself. This will require focus and discipline on your part, because if you don’t just happen to have that money in the bank when it is time to pay, then you must put some money aside every month so that the amount needed will build up and be available when it’s time to pay.
Also the money you are putting aside to pay the escrow bill can be invested up until it’s time to pay. You may as well earn interest on your money instead of just letting it sit idle.
Once a year mortgage companies will do what’s called an escrow analysis just to make sure that you are on track with the amount that you are paying for your escrow account. If you have an overage they will normally send you the check for the amount of the overage. If there is a shortage in the escrow account you will be required to attend to that problem. Sometimes they will require that you send in the shortage and indicate that you want that money applied to your escrow account otherwise it could be applied as a regular monthly payment which could cause a lot of confusion.
