How Do Escrow Accounts Work?
For the purposes of homeowners insurance, your insurance premiums are divided into monthly payments and entered into an escrow account. When payments on your premium are due, they will be routed to your homeowners insurance company. Many mortgage lenders prefer this method because it assures the lender that your home is actively insured and protected. It’s important to note that any other insurance payments, such as deductibles when you make a claim, will be paid to the insurance company, not your escrow account or mortgage lender.
Similarly, other expenses that may be paid on an annual basis—such as property taxes —will be divided up into manageable monthly payments that are “bundled” into your monthly mortgage payments through an escrow account.
Escrow Account Overpayments and Underpayments
With home insurance and mortgage insurance, you know annual costs ahead of time. For these expenses, it’s easy to divide them into 12 monthly payments. Other expenses, like property taxes, are variable—meaning they change year to year. For variable expenses like property taxes, your mortgage lender will need to estimate how much you will owe in property taxes.
For the most part, lenders from your mortgage company are fairly accurate with their estimations for escrow payment. Lenders will estimate what you need to pay based on what you owed in previous years. Sometimes, lenders will overestimate or underestimate the amount that needs to go into the escrow account.
In the case of overcharging, lenders will issue the homeowner a refund check for overages. In the case of undercharging, your lender may provide a few different options. One option is paying the remaining balance in one lump-sum payment. Another option some lenders offer is dividing the remaining balance into 12 payments to be made over the course of the next year.