Understanding Escrow

Learn about escrow accounts and get answers to common escrow questions.

Understanding an Escrow Account

When obtaining a mortgage for a home, many people utilize an escrow account to help them pay for some of the costs associated with homeownership. 

In this article, let’s take a look at escrow accounts, and some common questions homeowners have about them. 

What is an Escrow Account?   

An escrow account is set up on behalf of a homeowner by a mortgage lender in order to pay for certain expenses that go along with the home. A common use of an escrow account is to pay for the property taxes and insurance on a house.   

How Does an Escrow Account Work?  

When a homeowner makes their monthly mortgage payment, a portion of those funds goes into their escrow account to be held until certain expenses need to be paid. When these payments are due, the mortgage lender will make them on behalf of the homeowner.  

Do I Need an Escrow Account? 

It depends. Some mortgages require that an escrow account be used to pay for certain expenses on the home, such as property taxes or insurance. Other homeowners have the option to pay these expenses themselves. Your mortgage contract will stipulate if an escrow account needs to be established. Please consult your loan documents and/or reach out to a Bangor Savings Bank representative to discuss your options.

How is a Monthly Escrow Payment Calculated? 

The mortgage lender will estimate the annual cost of property taxes, insurance, and any other payments needed to be made with respect to the home. These estimates are usually based on information from previous years’ payments. 

Once an estimate is established, the mortgage lender will divide the needed escrow amount into 12 monthly payments. It is important to know that escrow accounts also need to have reserve funds as well.     

What is an Escrow Analysis Statement? 

An Escrow Analysis Statement is a document sent by the mortgage lender to the homeowner. The statement documents the balance of the escrow account as well as what the projected costs of property taxes, insurance, and other expenses will be in the near future. The purpose of the statement is to confirm whether the escrow account is properly funded. 

If this is not the case, a shortage of funds might occur. Should this happen, the mortgage lender will adjust the homeowner’s escrow portion of their monthly payment to make up any shortfalls. 

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.

Where Can I Get More Information About Escrow Accounts? 

Your Bangor Savings Bank Mortgage Loan Officer or any other team member is happy to discuss all the details of an escrow account with you and answer any questions you might have. Contact us today!