The Ins and Outs of Escrow

Home ownership is one of life’s greatest achievements, but with homeownership comes lots of lessons to be learned. Some lessons are learned the hard way through labor and renovations, while other lessons are learned easier through research and better understanding. If you’re a homeowner, you may have heard the term ‘escrow’ a time or two. Escrow is an important part of homeownership that can affect your monthly mortgage payment. Each year you will receive an annual escrow analysis statement from your mortgage lender that explains the estimated property taxes and homeowner’s insurance on your home for the next year. The escrow statement may look confusing, and you may have questions about the escrow statement. In this blog, we will explain what escrow is and the steps you can take to limit changes in your escrow.

What Is Escrow
Why Does My Escrow Payment Change?
What Happens If There Is a Shortage, or Surplus In My Escrow Account?
How Can I Change My Escrow Payment?
Why Choose American Bank & Trust as Your Mortgage Lender?

What Is Escrow?

Escrow is an important step in many real estate transactions. It is a process where funds are deposited into an account maintained by your servicer. The funds are used to ensure accurate and on-time payments are made for homeowner’s insurance, flood insurance, private mortgage insurance and property taxes. Once your escrow account has been opened (completed by the bank at time of the funding of your home loan), you will begin to make automatic monthly escrow payments into the account as part of your monthly mortgage payment.

What types of items are included in my escrow?

The disclosures provided by your lender up front and at closing will detail what items are and are not included in your escrow account. The most common items included in an escrow account are (this list is not exhaustive):

Property Taxes (aka Real Estate Taxes). These are taxes assessed by your county, city, municipality, etc and are paid directly to that entity. What taxes apply to you depend on where you are buying a home. In South Dakota, it is usually just county Real Estate taxes.
Homeowner’s Insurance (aka Hazard Insurance). This is the insurance that covers your home in the event of an accident or damage.
Flood Insurance. If your home happens to be in a flood zone, flood insurance is required and must be included in your escrow.
Mortgage Insurance (aka Private Mortgage Insurance). This is insurance that serves as a guaranty to the lender in the event of a loan default and is generally required on any loan where the initial loan to value is more than 80%.

Why Do My Escrow Payments Change?

Each year, your mortgage servicer performs an escrow analysis to ensure that you are contributing the proper amount needed for your taxes and insurance associated with your home. During the escrow analysis process, your mortgage servicer will review your current escrow account balance and forecast the required balance for distributions for taxes and insurance payments in the next 12 months to ensure you will have an adequate account balance to cover these amounts. Depending on the results of the escrow analysis, your escrow payments may increase or decrease due to a cost change in your insurance taxes. Your mortgage servicer will send you a statement that informs you if your monthly payment will change or remain the same. That statement will also inform you if there is a surplus or shortage in your escrow account as well as your options on how to address this amount.

What Happens If There Is a Shortage or Surplus In My Escrow Account?

If you have a shortage of funds in your escrow account, this means you are projected to fall below the minimum balance required over the 12-month period. You have two options to address a shortage.

Your mortgage servicer can automatically increase the escrow portion of your monthly payment to account for the shortage and put you back on track for consistent payments.
You can elect to make a one-time lump sum payment into your escrow account to keep your payment amount relatively the same.

The amount of the payment increase, or the lump sum payment, can be found on your escrow analysis statement.

If you have a surplus of funds in your escrow account, this means you are projected to be above the minimum balance required over the 12-month period. Your mortgage servicer will send you a refund check for the amount greater than $50.00 in your escrow account as long as your payments are current at the time of the escrow analysis.

How Can I Change My Escrow Payment?

A change in your escrow payment might throw you for a loop, especially if there is a shortage in your escrow account causing an increase in your escrow payment. If you have a shortage in your escrow account, you can pay the difference of the shortage to continue your normal escrow payments. You can also shop for a new homeowner insurance policy with a lower premium. If you choose to change your homeowner’s insurance to one with a lower premium, your monthly escrow payments may also decrease at your next escrow analysis. Contact your mortgage servicer to inform them of the change in insurance provider so they can review.

Why Choose American Bank & Trust as Your Mortgage Lender?

Escrow is an important step when purchasing a home, but escrow services can vary depending on the company or agent you choose. It’s important to do your research and choose a reputable company with a good track record. American Bank & Trust is no stranger to home mortgage lending. We offer free pre-qualification for extra confidence when shopping for your home or refinancing your existing mortgage. We take great pride in getting to know you like a neighbor so we can help you achieve your homeownership goals. American Bank & Trust offers a wide range of home loan programs to fit your finances. Below are some of the mortgage programs offered by American Bank & Trust.

Open the door to a better life by financing your next home with American Bank & Trust. Visit any of our AB&T branch locations, call us , or email Mike Roby to get started on financing your dream home!