An Escrow Account
An escrow account is an account maintained by the lender to collect funds from you (the mortgagor) in order to pay the property taxes, homeowner property insurance, flood insurance (if applicable), and/or private mortgage insurance (PMI) due on your loan.
TruStone Financial reviews your escrow account each year to make sure there are enough funds to cover your private mortgage insurance (PMI),***, homeowner's hazard insurance** and/or property taxes. This escrow analysis will show you the amount of taxes and/or insurance paid on your behalf in the past year with the funds from your escrow account. The escrow analysis also highlights what we project to pay next year. At that time, there may be a surplus or a shortage.
A surplus is determined based on the projected balance for the next 12 months. Surplus less than $50.00 will be prorated and your monthly payment adjusted accordingly. A surplus of $50.00 or more will be refunded.
A shortage occurs for the following reasons: Most commonly, an increase in your property taxes and/or insurance will result in an escrow account shortage.
The shortage amount will be divided into 12 months and added to the mortgage payment. You may choose to pay the shortage in full. To avoid a similar shortage in the upcoming year, your new escrow deposit will be calculated for 1/12 of the current tax and insurance payments. If your current tax and insurance payments are more than the previously projected monthly breakout, you may need to contribute more per month. A two-month escrow cushion* is also required to be a part of your new payment.
Annual Escrow Account Disclosure
An Annual Escrow Account Disclosure statement will be sent at least 30 days prior to your payment change to notify you of any change to your escrow payment.
*Escrow Cushion: Funds mortgagor may be required to pay into the escrow account in order to ensure that sufficient funds are available for unanticipated disbursements for escrow items. Typically, the cushion equals two months of escrow payments, unless reduced or eliminated by federal and state law. The lesser amount prevails.
**Homeowner's Hazard Insurance: An insurance coverage that compensates the insured in the event of property loss or damage. Hazard insurance is a requirement for all loans. The mortgage agreement requires that the borrower keep the improvements of the property insured against loss by fire, hazards included within the term "extended coverage", and any other hazards, including, but not limited to, earthquakes and floods, for which the lender requires insurance. This includes an HO6 policy for residents of condominiums, which protects "walls-in" items.
***Private Mortgage Insurance (PMI): Provided by privately owned companies on loans with down payments less than 20 percent of the purchase price. The insurance protects lenders in the case of default by mortgagors.