Escrow Analysis Frequently Asked Questions
Q. What is an escrow account?
An escrow account is a fund set up on the borrower’s behalf to pay any property taxes, insurance, and/or mortgage insurance. The funds are held in a separate account, and the money is never used by the bank for anything other than to pay your taxes and insurance. An escrow account provides a better way to budget property tax and insurance payments by making smaller monthly deposits instead of having to come up with a lump sum when the bills are received. It ensures that all taxes and insurance are paid on time.
Q. How exactly does escrow analysis work?
- We add up the estimated amounts scheduled to be paid from your account and then divide the total by 12 months to determine the monthly collection amount.
- Then we analyze the projected balance for each month based on the starting balance, the monthly escrow collection amount, and the bills we anticipate paying.
- Finally, we find the month with the lowest projected balance. If this low point is less than zero, the account has a deficiency: if it is less than the allowed cushion amount, the account has a shortage; and if it is greater than the cushion amount, the account has a surplus.
Q. How often will my escrow account be analyzed?
Escrow accounts are analyzed on an annual basis. This means that your monthly payment may change annually.
Q. Why are my tax and/or insurance amounts always projected?
We have to project your tax and/or insurance premiums based on the amounts you paid in the previous year, unless we received official notice of an amount change for the upcoming year from a taxing authority or insurance provider.
Q. What is an escrow cushion?
An escrow cushion is an additional balance in the escrow account ensuring that there is enough money in the account to cover expenses for the property. This is the lowest that the balance in your escrow account should ever fall, assuming no unexpected increases or additional payments occurred during the year.
Q. Why does Dart Bank require a two month cushion?
The escrow cushion kept in the account helps to make sure there are enough funds for the bank to pay taxes and insurance as they come due. There is always the possibility of changes in the insurance premium or higher tax amounts than what was predicted throughout the year. Having a cushion reduces the impact of any shortages that occur when the escrow payments increase, due to increases in the taxes and/or insurance policies.
Q. Why does my escrow payment change every year?
Property taxes and homeowner’s insurance amounts fluctuate every year; therefore, escrow payments need to be adjusted either up or down to accommodate any unexpected changes. This could be an increase or decrease based on the circumstances of the previous year.
Q. Why did my property taxes not increase right away after I purchased and/or built my home?
In many states, property taxes are reassessed the year after a home is purchased or built. This means that your property taxes may go up significantly in the second year that you own the home. If you have had a house built, more than likely the initial taxes will be based on the value of the land/unimproved lot.
Q. What is an escrow surplus?
If your taxes and/or insurance costs were lower than expected, your account may have a surplus. If the surplus is $50.00 or more, a surplus check will be included with your annual escrow analysis. For a surplus less than $50.00 the funds will remain in your escrow account. If you received a surplus check, depending on your individual circumstances, you may want to consider redepositing these funds into your escrow account if you feel that you may have a shortage next year. For example:
- If your property was a new construction and has not yet been fully assessed, you will have a shortage next year once it has been reassessed by your taxing municipality.
- If you purchased a property that is not your primary residence, your taxes may increase next year due to the fact that it will be reassessed as a non-homestead property, resulting in higher taxes.
Q. What is an escrow shortage?
A shortage occurs when the escrow account balance at its projected lowest point for the next 12 months is below the required minimum balance. This required balance is typically equal to two months of escrow payments, this is the cushion. It helps to protect you, so you have enough funds in the account to cover an unexpected tax and/or insurance increase.
Q. What is the difference between a Surplus, a Shortage, or a Deficiency?
A surplus is the portion of the projected escrow balance that is greater than the cushion amount, a shortage is the amount by which the escrow balance falls short of the cushion amount, and a deficiency is the amount by which the balance goes below zero. When the account has a deficiency, it will also have a shortage.
Q. How can I have a shortage?
There are a few reasons why you might not have enough money in your escrow account to meet the minimum balance:
- Your property taxes and/or insurance premiums increased.
- Your taxes were reassessed.
- Your insurance provider changed.
- Your due date of your property taxes and/or insurance premiums changed.
- You made fewer escrow payments in to your account than expected.
Q. What are my options for paying my escrow shortage?
- Option 1: Pay the full shortage now. (Please note, if your tax and/or insurance expenses have increased, your monthly escrow payment will still increase, even if you pay all of your shortage. Your escrow payment will never be less than 1/12 of your total anticipated annual disbursements.) If you choose to pay the shortage, you may send or bring in the funds and specify that they are for your escrow shortage.
- Option 2: Pay nothing and we will spread the shortage amount evenly across next year’s payments.
Q. Why is my escrow payment increasing even though I paid my shortage?
An escrow shortage is the result of differences that occurred in the past, when the funds in your escrow account were less than what was required to cover the actual payments from your account. The escrow portion of your new monthly mortgage payment is based on projected activity for the coming year. Even if you pay your shortage, your payment can increase if your annual property tax or annual insurance premium increases.
Q. Who should I contact if my property taxes increased?
If you have questions about an increase in your property taxes, please contact your local taxing authority; they are the best source for information to explain any changes in your tax bill.
Q. Who should I contact if my homeowner’s insurance premium increased?
If you have questions about an increase in your homeowner’s insurance premium, please contact your insurance company or their local agent; they are the best source for information to explain any changes in your annual premium amount.