Three items go into escrow: taxes, insurance, and funds for a cushion.
An escrow analysis is when we take these items and estimate the amount you'll owe for your property taxes and homeowners insurance over the next 12 months. Take the following example of a hypothetical Lakeview homeowner whom we’ll call Frankie.
Homeowner Example
First, we estimate Frankie’s tax and insurance values from his loan closing documents, local property tax office, and insurance carrier. Frankie’s yearly property taxes are estimated to be $2,000. His yearly homeowners insurance is estimated to be $1,600. Combined, his yearly total is $3,600.
Next, we take $3,600 and divide that by 12 months. We now have a monthly escrow amount of $300.
Finally, we calculate Frankie’s cushion. Because an escrow cushion is typically equal to about two months of escrow payments, we take the $300 he will contribute to escrow each month and double it. Now, Frankie has a $600 cushion in his escrow account and is prepared—just in case his taxes and insurance go up.
In the end, Frankie’s yearly contribution to escrow is $4,200, so his monthly mortgage payment includes $350 that goes into his escrow account each month.
Changes in Your Escrow Payment
Monthly mortgage payments are made up of principal, interest, and escrow. Although principal and interest are typically on a fixed rate and won’t change (however, interest rates will change for adjustable rate mortgages), your escrow payment amount can change. After all, our escrow analysis reflects an estimate of the disbursements that we'll make throughout the year.
If your tax or insurance amounts do change, and no longer match our estimate, you may end the year with a shortage or surplus in your escrow account. For example, if we projected Frankie’s tax or insurance values too low, he'll pay extra to make up the difference. Or, if we projected these amounts too high, we’ll send him a refund!