What is a mortgage escrow account? How do mortgage escrow accounts work? Who's got my money? Why should I have them pay my bills
and not me? In this video,
I'm going to explain the answers to those questions
because I know it's confusing. People don't understand why they're paying
upfront and they're paying per month. But don't worry. In this video,
I'm going to explain to you why, how and what to look out for. All right. Matt the Mortgage Guy. Residential mortgage broker
with UMortgage, licensed nationwide. Reach out to us. Greatmortgagebroker.com. We'll help you with all your mortgage
needs. In this video,
I really want to jump into this question because it's one of the most
popular videos I've made on this channel. How do mortgage escrow accounts work? It's such a common question
that I get it over and over again when we're explaining
the loan estimates to clients. They don't understand. What does it mean when I'm prepaying
my property taxes and insurance? Why, if I'm prepaying, is it also included in my mortgage
that I'm paying every single month. So rest assured. In a few minutes I should be able to explain it, hopefully
in a way that makes sense to you. Before I go into some details
and use some numbers, which I think is always a good idea
to use real life examples. Let me just explain to you
how it works, right. After you purchase the home,
your lender establishes an escrow account
to pay for taxes and insurance. Your county is going to assess property
taxes. You're going to pay that.
Then you've got homeowner's insurance. It also might include private mortgage insurance if you've got
a loan with mortgage insurance. Right. So after closing, your servicer takes
a portion of your monthly mortgage payment and holds it in a separate account,
escrow account, until the tax and insurance
payments are due. And then they disperse. Again,
I'm going to use a real life example with real numbers,
so stay tuned and I'll show you there. But one thing to keep in mind is that the amount required is a moving target. And people always get bent out of shape
like my mortgage payment changed. I don't know what's going on. More often than not,
if your mortgage payment changed, it's because there was an adjustment
to your escrow account. They were holding too much. They were holding too little. And they had to make an adjustment, right? Your tax bill and your insurance premiums
can change from year to year. Your car insurance might go from
one number to up 20% year on year. Homeowner's insurance can do the same. Here in California when we've got
as many fires and natural disasters as we got, like, you know, insurance
companies have to raise their premiums. So if your homeowner's insurance goes up and your current escrow account
held by your servicer doesn't have enough money in it,
they're going to have to readjust. We're going to have to hold 20
more dollars per month. When this happens
and they do an escrow analysis and it's short by $500. They'll give you the option. Would you like to pay that 500 in a lump
sum and then take this new payment that is going to be, you know, 40
some odd dollars more per month because we're needing to hold $500 more. Or would you like to raise your payment
a little more? And over time, pay off this $500 shortage? I can get into more detail about that. But really, it's like such a specific, you know,
dependent on what the shortage is and who your servicer is that,
you know, we could analyze for hours on that. Know that whoever's holding that escrow account is going to analyze it
like that every single year. And let's take a really easy
example for numbers sake. Let's say your annual property
taxes are $6,000 and your homeowner's insurance is $1,200. That's a total of $7,200 a year that they have to hold to pay these bills. So they take that $7,200 per year
and they divide it by 12, $600 a month. So every month, maybe you make a payment of $2,500
a month. 1,900 goes to taxes and insurance. 600 goes to this escrow account. And really, it's just $600 per month being added
to let's just call it a savings account. And if this savings account
started with $2,000, after you pay them 600 in the first month
payment, it's 2,600. Then you pay them
the next month's payment and it’s 32. You pay them again,
you got 3,800 in that escrow account showing up on your statement. You get to see it. Escrow account balance $3,800. But now because you've got,
what did we say, $6,000 a year in property
taxes, 3,000 of that is due. They bill twice a year. 3,000 and 3,000. So 3,000 is due from that 3,800
they disburse and they'll tell
you it'll show up on your statement. It’ll show up if you if you have an online
account $3,000 dispersed to the county. Now you've got 800 in that account. Now it goes to 14 and 2,000, 26 and 32 as 600 is being added. Right. And it gets up to whatever number it's at,
1,200 gets disbursed to pay for the homeowner's insurance bill
that's renewing for another year. And then whenever the next round
of property tax, $3,000 goes to them. Every year they'll analyze this. And if they've got too much
in that account, they need a little bit of reserves,
but they can't hold too much. And they've got rules
on how much they can hold. If they've got too much,
they're going to offer you a refund and then adjust your mortgage payment
accordingly. If they don't have enough,
they're going to say, listen, we've only been
withholding $600 a month from you, but when we analyze it, it's not 7,200
a year that we need. Your property taxes are now,
you know, call it 6,500 and your homeowner's insurance
went up to 1,800. So now we've got 65 and 18. We've got $8,300. We type that into our calculator and we need to collect 69166 per month. And you know, if there's a shortage,
they're going to collect that in a one time payment
or they’re going to do whatever. They're going to increase your mortgage payment by $91.66
to make up for the shortage. Right. That's how it works. And that's how when you get something
that says, you know, there's an escrow shortage and you're payment
goes from 2,600 to 2,691. What the heck happened?
They raised my mortgage payment. I get that a lot. Right. We've closed thousands of loans
and they say they raised this service or raised my payment.
Didn't raise your payment. They made an adjustment because the escrow
account where they're paying your tax and insurance from didn't
have enough in it. Right. And so that's the essentials
of how it works. Another area where
people get really confused is upfront. You're getting a mortgage and
they're going to set up an escrow account and you're going to get a loan estimate. And on page two of the loan estimate,
you're going to have F and G. Let me call them back. Prepaid and initial escrow payments
at closing. 12 months, homeowner's insurance
premium paid in full. Then three months homeowner's insurance. Why the heck you got paid twice
and then seven months of property taxes. Well, down here, that's that buffer
I spoke about. They need to have something in there
in the account. You know, you paid in January of 23. You're 12 months of homeowner's insurance. But if we close late January
and don't have a first payment till March in order to have enough money in there
to renew next January, they're going to have to take
a few months of reserves for that homeowner's insurance. And just the same with the property taxes. Let's collect seven months upfront
because we might have a bill that's paying for six months of property taxes due
within a month of your first payment. And we haven't collected any money yet. So we need to collect upfront
to not only have a little bit of a buffer, but to be ready for those payments
that are coming due. So hopefully this clarifies it for folks. It's, you know, something that really,
you know, I understand how most folks get a little bit confused
by it because it just, you know, it's new for a lot of folks
and they're like, who's got my money? What's going on with it? The mortgage servicer is the person who from closing until you pay off your loan,
they collect your mortgage payments, they maintain the record of payments
and they manage your escrow account. That's all they're doing
is holding this money. Common question. Do I get paid interest? You do.
I just looked on one of my statements. I got $12 and some odd cents on one. $23 on another. And it just gets plopped
into your escrow account. Interest paid on escrow balance. That's probably better than the banks
are giving me on, you know, a couple thousand bucks sitting in those accounts
so to have a couple of thousand in escrow. No harm, no foul. People want to know,
do I have to have an escrow account? Depends on your loan type. So if you're getting a loan
and you think this is not for me in my personal opinion, you don't want
to remember another thing to pay. You also don't want to be responsible
for budgeting for that. Because if you're like most people,
putting that money aside every single month for that property tax bill is going to be
a lot more effective and a lot less stressful than boom, $3,000 tax bill shows up
and you got to figure out how to pay it. So hopefully this is helpful. I appreciate you watching. Like, comment, subscribe. Share this with a friend. Greatmortgagebroker.com. If you want to connect me and my team. If you're looking for an agent
anywhere in the U.S.. Go to homeandmoney.com/matt. If you're looking for
other mortgage videos to learn more about mortgage stuff,
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