Many people get surprised every year around spring time when they receive their yearly escrow analysis letter in the mail. The reality is however not many home owners understand it or how t works. Let me explain how the escrow analysis works and even give you some advice on getting a head start on the following years analysis so you are not surprised.
Firs the escrow analysis is just that, a yearly analysis of your escrow account. Remember your escrow account is what your mortgage establishes and puts funds in from your monthly payment to specifically pay items such as your taxes and insurance. Often if you have a flood insurance policy or mortgage insurance they will collect for those items as well. Essentially they will look at what the total amount of those items, divide it by twelve and charge you that portion in your monthly statement. So theoretically you will have enough funds to pay those obligations when the time comes.
The yearly escrow analysis essentially is like a yearly check up to make sure everything is still on track, which usually happens in the spring sometime. The reason this is needed is in case there are changes in the amounts they are collecting.. AKA your taxes going up. So if your taxes go up or anything else for that matter they want to know about it so they can adjust your account.
So the analysis does this then they let you know via a letter in the mail. This letter gives you the results of their findings. Our example will be that the expense for the prior year went up by $120 a year. So essentially they had to pay out $120 than they were expecting or had budgeted for so they are short those funds and will ask you to pay it back. This is where they give you two options.
In this option they will ask you to send them a check for the shortage of $120. Those funds will take care of the shortage. However they also have to make sure they have enough for the following year so they will make an adjustment to your monthly mortgage payment because now they have $120 more they have to pay out. So they simply divide the $120 by 12 and get a result of $10. In this case your payment goes up by $10 to comply with the new amounts they anticipate to pay out. So… short review… pay $120 for the past shortage and raise your monthly payment $10 so it isn’t short in the future.
In this option the borrower may not have the additional $120 up front to give so the lender will give them to option to pay it off over a year. So they will spread the escrow shortage of $120 over 12 months, which comes out to $10 a month. However they also have to increase your payment $10 a month as well to not have a shortage this upcoming year, since the expenses went up by $120. So the net result in Option 2 is your payment going up by $20 per month. This is a common option for those who are surprised by the jump and may not have the funds at that moment.
Please keep in mind either way the math total is the same, at the end of the day they will be getting the $240 over the course of 12 months.
Confused? I hope not, but if you are you are more than welcome to give me a call, email or comment and I will be more than happy to help you. I offer this service to folks so they can get some clarity on the issue because it will be happening every year.
So how can you be proactive about this analysis and not be caught by surprise by the letter? Simple first know your expense, usually the annual insurance bill and taxes are the two main items being collected. When you get your insurance renewal compare the amount to the previous years amount. Same with taxes, when you get your proposed values from the appraisal districts you should get an estimate of taxes, compare that to the previous years taxes. Get the differences in the insurance and taxes and that is what your shortage will be… assuming both go up. Save those funds between now and when the escrow analysis letter arrives which is early spring. Also divide that amount by 12, that will tell you what your payment will be going up by.
Simple right? Again I will be more than happy to go over this with you anytime, just send me an email or call me.
I hope this cleared up the confusion of an escrow analysis, just remember it is simple math, don’t get caught by surprise and be proactive!
I hope your picked up a thing or two, with the heart of a teacher I am a big fan of educating my clients so they can feel confident when they make their real estate decisions. If I can be of service please do not hesitate to contact me.
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Luis Cuevas, Realtor®
RE/MAX Cross Country
1990 Justin Road
Highland Village, Texas 75077
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