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Escrow for taxes/insurance

mortgage fundamentals
Escrow for taxes/insurance

With an escrow account, you pay your yearly insurance and taxes in monthly payments along with your mortgage instead of saving up to pay your annual property taxes and insurance in lump sum.

While only USDA and FHA loans require an escrow account, they may be required by your lender if you are putting less than a 20% down payment on your house.

Pros:

  • Lower mortgage costs: there may be a discount on your interest rate if you elect to have an escrow account

  • The lender is responsible for making the payments: You'll never need to worry about making payments to your homeowner's insurance or property tax payments. Your lender will pay these fees on time automatically for you.

  • You do not need to set aside extra funds each month: The amount that you need for taxes will be automatically added to your monthly principal and interest mortgage payment. Often this is referred to as "PITI" which stands for "Principal, Interest, Taxes, and Insurance."

  • You won't have to worry about paying large bills around the holidays: Property tax payments are often due around the end of year holidays. If not prepared, this could stretch your monthly budget thin. An escrow account manages this risk for you and spreads the payment across the entire year!

  • Makes it easy for first-time homebuyers: Escrow budgets for you and helps reduce your worrying about making your payments on time.

Cons:

  • Escrow accounts tie up your funds: If you're already good at saving money and feel like you can manage to put aside money on your own for annual insurance and taxes, you do not need an escrow account. Plus, if that money stays in the bank, you can continue to earn interest on it until the bills are due and then put that money to work for you.

  • There is an upfront payment to set up your escrow account: You may be required to deposit several months of property taxes when you open the account which would lead to higher closing costs.

The Escrow Calculation

Escrow is calculated by adding the annual taxes and insurance premiums and dividing by 12. This is the amount that will be included in your monthly mortgage payment and added to your escrow account every month plus any required reserve or shortage amount necessary.

Escrow Cushion (Reserve)

With new loans, because no payments have been made, the escrow account has no money in it to cover home expenses. The lender may require that you put money into the account in addition to the monthly payments. This is known as the escrow cushion or escrow reserve. A reserve fund ensures the escrow account has sufficient funds to pay unexpected expenses, even if you start missing payments. This protects you and your home by making sure that there are enough funds to pay property taxes to avoid foreclosure from late payments.

Escrow Analysis

Year to year your monthly escrow payment may fluctuate, due to what is called an escrow analysis. An escrow analysis is done by your mortgage servicer at least annually to make sure there are enough funds in your escrow account to cover your insurance and property taxes. The analysis will determine if there is a shortage or surplus in your account and adjust your monthly payment accordingly. If there is a surplus, you will be refunded the amount over what you owe, and your monthly payments will likely be lowered. However, if the analysis shows you have a shortage it means that you will have to pay the amount your escrow account is underfunded.

Escrow Shortage:

An escrow shortage is caused by an increase in either your taxes or insurance during the year that your mortgage servicer was not made aware of prior to setting your escrow amount. A shortage can occur for a variety of reasons but is typically due to increases in your property taxes or insurance premiums.

To pay back the amount, typically servicers like Homepoint will spread the escrow shortage amount over 12 months. Be aware, this could raise your monthly amount more than expected because you may have to pay the shortage AND the new increased monthly amount. Please note that you do have the additional option of paying the full escrow shortage in a lump sum amount as well.

Don’t worry if you have a shortage, it is completely normal, and just means that your insurance and/or taxes went up.

Escrow Surplus

An escrow surplus typically means that there was a deduction in taxes or insurance that your mortgage servicer was not made aware of. This means that you have additional funds in your account at the time of the escrow analysis that are not needed. If there is a surplus greater than $50 and your loan is current, you will be refunded the amount over what you owe during your annual escrow review, and your monthly payments will likely be lowered. If you are delinquent on your monthly mortgage payment and have a surplus in your escrow account, the funds will remain in escrow and will not be refunded to you.

Escrow Removal Requirements

For Homepoint to remove an escrow account the following must be true of the loan:

  1. The loan is a conventional loan

  2. The escrow account balance is positive

  3. There are no outstanding fees or late charges on the account

  4. The escrow account was not a setup due a taxes or insurance non-payment

  5. The account must be due for the current month and there have been no late payments in the last 12 months

  6. Your LTV must be below 80%

Homepoint cannot remove escrow accounts on certain types of loans such as FHA, VA, USDA or loans that require flood insurance. FNMA and FHLMC investor guidelines do not allow escrow waivers on conventional loans that have a LTV greater than 80%. If a loan is in a mandatory flood zone, the account must remain escrowed for Flood Insurance. This is a Federal Requirement and can’t be waived/overridden by a manager.

If the loan is a Higher Priced Mortgage Loan (HPML) escrow cannot be cancelled until 5 years after consummation and the unpaid principal balance is less than 80 percent of the original value of the property.

Please note, each loan type has different requirements that may not be listed above. Because of this, it’s best to call your mortgage service to inquire about your specific requirements in order to determine if removal of your escrow account is feasible.

Still have questions?

Find our most frequently asked questions here.

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Ann Arbor, MI 48105
Toll Free: (800) 686-2404
wecare@homepointfinancial.com
NMLS# 7706
nmlsconsumeraccess.org

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Home Point Financial Corporation d/b/a Homepoint. NMLS No.7706 (For licensing information, go to: www.nmlsconsumeraccess.org). Home Point Financial Corporation does not conduct business under the name, “Homepoint” in KY, LA, MD, NY, or WY. In these states, the company conducts business under the full legal name, Home Point Financial Corporation. 2211 Old Earhart Road, Suite 250, Ann Arbor, MI 48105. Toll-Free Tel: (888) 616-6866. For Licensing and Disclaimers visit www.homepointfinancial.com/about-us/licenses.