Saving through your Mortgage Escrow

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SAVING THROUGH YOUR MORTGAGE ESCROW

If you own your own home, odds are you financed the purchase of the real estate with a mortgage. Usually, the lender requires the buyer/borrower to escrow funds to assure the payment of real estate taxes and hazard insurance. This escrow is funded as part of the monthly mortgage payments — the amount the borrower sends to the lender will include not only the monthly amount of principal and interest, but a prorated amount of the full year’s real estate tax and insurance bills.

However, while the monthly amount paid for principal and interest is usually set for the life of the loan, real estate taxes and insurance bills will change from year to year (and, unfortunately, those amounts tend to always go up). Therefore, the lender adjusts the borrower’s escrow amount annually.

Lenders tend to schedule this annual review of a borrower’s escrow according to their own rules. It might be during the month of the anniversary of the date the borrower closed on the mortgage. It might be on a date the lender arbitrarily chooses each year. If taxes and insurance premiums have gone up appreciably, the lender will adjust the amount the borrower pays to cover the increase. The adjustment could be based on a variety of factors, but the lender will usually make projections based on past amounts, as well as making some future assumptions. The lender will use its own formula to figure this out, potentially leading to a shockingly large increase in a borrower’s monthly payments.

To avoid this, borrowers should contact their mortgage lenders after receiving the actual tax bills or insurance premium invoices, and ask for an analysis and review of their escrow account. When the lender bases its projection on actual concurrent payment information, the borrower may be pleasantly surprised that the escrow amount paid each month might be lower. This is particularly true if the home is located in an area hard hit by the recent economic downturn. If the value of the property has fallen, and the increase in taxes (if there are increases) are not assessed at the same rate as in the past, there is a distinct possibility the lender will determine that the escrow payments can be less. Also, even if the analysis leads to an increase in the borrower’s escrow payments, that increase will likely be less than it would have been if the lender had relied on its own internal projection formulas.

It is possible to have your monthly mortgage payment lowered because you have made a good-faith inquiry with your lender, requesting an updated escrow analysis. Even if this isn’t the result, and your escrow amount increases, at least it will be based on the actual tax bill or insurance invoice, which is at lease objectively justifiable and fair.