Every year about this time, I get my friendly letter in the mail from my mortgage company giving me my escrow analysis. Usually too this is about the time I get phone calls from my clients asking me why their payments went up so much.

To explain a bit about escrow accounts, as you are aware this is the account that sets aside the money from your payment each month to pay for your taxes and insurance. There must be a cushion in the accounts to help pay for any increases in either one. Many times those who purchased a home that is new construction find themselves with the largest escrow balance that is short due to the fact that when they purchased the house the taxes were assessed on the lot only, now the new tax bill reflects the lot and the new home.

To determine your new escrow amount, the servicer takes any shortage (negative amount) in your escrow and divides it by 12 months to repay back the shortage. You can opt to pay the shortgage directly to them to avoid this increase in your payment. Then your account is analyized for the lowest projected shortage. Once that is determined, federal law allows for a servicer to collect a certain percentage of your escrow for the increase in taxes and insurance. The projected lowest balance is subtracted from the allowed escrow amount and the escrow shortage (or overage in some cases) is determined. This shortage amount is divided by 12 and added to your payment. If the escrow began with a negative amount then that is added on as well to give you a new monthly payment. If you have an overage, that may be refunded to you. If you notice an error, by all means contact your servicer. As always, please call me with any questions you may have.