What is Escrow and How Does it Work?
What is an escrow account?
When you obtain a loan that is secured by real estate, you are given the option to set up an escrow account. Your lender collects the money from you on a monthly basis for property taxes, homeowner’s insurance, flood insurance and private mortgage insurance, holds it in the escrow account, and then pays those bills on your behalf when they come due. For your lender, the main purpose of an escrow account is to protect their lienholder interest in your home. The borrower benefits by spreading out payments on a monthly basis for bills that are due throughout the year.
What is an Escrow Account Analysis Statement?
Your lender is required by federal law to conduct a review of your escrow account at least once per year. Known as an escrow analysis, this review looks at the prior year’s escrowed items and performs a recalculation of the payments to determine the necessary amount of funds to maintain in the account.
If the results of the escrow analysis determine there is a shortage or deficiency (see section E and F) of funds in your account, your monthly escrow payment will be increased to collect these funds over a 12 month period.
If the analysis determines that your account contains an overage of funds of $50.00 or greater, your lender will return the overage amount to you in the form of a check. The results of the escrow analysis are summarized and mailed to you in a document called an Escrow Analysis Statement.
How is my escrow payment calculated?
When establishing an escrow account, your lender will calculate the total annual payments for all escrowed items. The annual amount will then be divided by 12 to calculate your monthly escrow payment. This monthly amount is added to your principal and interest payment to make your total loan payment. An escrow analysis is run 45 days prior to a payment change. For those loans serviced by Bangor Savings Bank a cushion of one month’s payment will be held in the account at all times.
Additional Frequently Asked Escrow Questions
Am I required to have an Escrow Account?
Escrow accounts are required in some cases – please consult your loan documents and/or reach out to a Bangor Savings Bank representative to discuss your options.
Why am I getting an Escrow Analysis Statement?
Escrow Analysis Statements are run annually, in the month your loan was originated to ensure your lender is collecting enough funds in order to satisfy payments made from the account during the year.
Does my escrow account accrue interest?
For borrowers with real estate in states that require interest paid for escrow, interest is accrued daily, and added to your escrow account balance quarterly.
How are tax and insurance amounts calculated?
Property tax and homeowner’s insurance amounts are calculated from the previous year’s payments.
How do I add or remove escrow from my loan?
You may submit a written request to add escrow to your loan at any time. You may also submit a written request to cancel your escrow account, if your loan agreement allows. The written request must be signed by all borrowers.
Why do I have a shortage?
A shortage occurs when the projected escrow balance is less than the required escrow balance. Shortages are automatically spread over 12 months and included in the new escrow payment. Borrowers have the option to pay the shortage up front and re-calculate the escrow analysis.
Should I pay the shortage?
You have the option to pay the shortage/deficiency as a one-time payment rather than increasing your monthly loan payment. Payments can be made at your local Bangor Savings Bank branch or contact us for other payment options—whichever method is most convenient for you. Once your payment has been made, you will need to make a request to have a new escrow analysis performed to adjust your monthly payment. This request does not need to be in writing. Please note, paying the shortage and/or deficiency will not keep your monthly escrow payment the same as the prior year.
Why is my payment increasing?
Payments often increase as a result of an increase in escrowed items or the collection of a shortage and/or deficiency.
Why am I getting an overage check?
An overage check is the result of your actual balance being higher than the coming year’s minimum required balance. Any amounts of $50.00 or greater are automatically refunded back to you. If you believe that you should not receive an overage refund, please contact us.
Do I need to send you my property tax bill?
No, it is not necessary for you to send us a copy of your property tax bill. As part of our commitment to provide you with the best possible experience, we ensure that this information is provided to us with no inconvenience to you.
What causes payment fluctuations?
Payment fluctuations are a direct result of increases/decreases in your escrowed items. If you have specific questions regarding these increases/decreases you will need to contact the billing provider.
How can I get my escrow payment to remain the same?
Your Escrow Analysis Statement will illustrate your shortage and deficiency amounts, which can be paid to reach your minimum escrow payment. It is unlikely your payment will remain the same if you have an increase in your escrowed items.
What happens to my escrow balance when my mortgage is paid off?
Your escrow balance is automatically applied to your principal balance of the loan. If your escrow balance is greater than your principal balance at the time of payoff, you will receive a check for these funds.
What is a cushion?
A cushion represents 1/12th of your annual escrow distributions.