Here are some answers to frequently asked questions regarding escrow analysis.
An escrow account is a fund set up on the borrower’s behalf to pay any property taxes, and/or mortgage insurance. The funds are held in a separate custodial account, and the money is never used by Harvard University Employees Credit Union (HUECU) for anything other than to pay your taxes and insurance. An escrow account provides a better way to budget property tax and insurance payments by making smaller monthly deposits instead of having to come up with a lump sum when the bills are received. It ensures all taxes and insurance are paid on time.
An escrow cushion is an additional balance in the escrow account ensuring that there is always enough money in the account to cover expenses for the property. This is the lowest the balance in your escrow account should ever fall, assuming no unexpected increases or additional payments occur during the year. Escrow account regulations fall under the federal law called Real Estate Settlement Procedures Act (RESPA). The RESPA statue allows HUECU to maintain a cushion equal to two months of escrow payments.
Property tax amounts fluctuate every year; therefore, escrow payments need to be adjusted either up or down to accommodate any unexpected changes. This could be an increase from the previous year or a decrease based on the circumstances of the previous year.
The shortage or surplus on your escrow account is calculated by adding up the total of all projected disbursements to be paid from your escrow account between August of the current year we are in, and July of the next, or upcoming year. This total is divided by 12 months to arrive at the “base” or monthly escrow payment needed. This base escrow payment is then multiplied by 2 months to determine the required “cushion” to be kept in the escrow account throughout the year.
(NOTE: Any private mortgage insurance being paid through your escrow is subtracted from the base escrow payment before calculating the required cushion.)
Your current escrow balance will have any expected escrow payments added (typically your August 1st payment) and any insurance disbursements expected in August subtracted. This creates the “Current Balance
Projection.” The difference between the “Current Balance Projection” and the “Required Baiance Projection” is the shortage or surpius amount. The “Required Balance Projection” is calculated by determining the balance needed at the beginning of the escrow year, after all 12 base escrow payments are made and all projected disbursements are paid and the escrow account never drops below the required cushion.
Escrow shortages are calculated to be paid back over 12 months. After 12 months this portion is automatically removed from your payment, and another analysis of the escrow account will occur.
Another option is the shortage amount can be paid all at once at the beginning of the escrow analysis year. HUECU will then deposit these funds into your escrow account and re-calculate your monthly payment using the new, higher starting escrow balance created by your payment.
One common reason is that your property tax payments could have gone up and HUECU adjusted the payment to reflect any changes
This will only happen if you have an adjustable rate mortgage. If a rate change is scheduled during the year, this will change the principal and interest portion of your payment. When you also have an escrow account, your escrow payment fluctuates through the annual escrow analysis in August. This adjustment only changes the escrow portion of the payment and not the principal and interest.
The amount of your payment that is applied to the principal and interest due on the loan is not changing and never will if you have a fixed rate mortgage. The escrow portion of your payment will change due to the amount of your property taxes. HUECU must collect enough funds in your escrow account to be able to pay everything that is due for all taxes and insurance.
HUECU will automatically add the amount of the shortage and/or deficiency to the amount of your escrow payment spread out over 12 months. The amount of the shortage and/or deficiency can be paid in full and HUECU will re-calculate the escrow payment based on a higher starting escrow balance. Finally, a waiver of the escrow account can be reviewed upon request. If approved, the escrow account would be closed; all funds in the account refunded to the borrower and the borrower would be responsible for paying any taxes due going forward.
NOTE: Loans that have private mortgage insurance are not eligible for escrow waivers.
The minimum amount an escrow payment can be is the total amount of all payments to be made for the year divided by 12 months. If there are extra funds in the escrow account than what is required to pay the disbursements for the year, HUECU is required by RESPA to disburse any funds back to the borrower if the amount is over $50.
Most towns/cities do not update the tax amounts for the year until July. HUECU waits until after the first installment of taxes is paid for August before beginning to review the accounts to make sure everything is accurate on the escrow accounts. This review is finished sometime in August and then the final statement is sent out. We want to make sure time is allowed for all, to adjust for any possible changes in payments due in September.
No fees are assessed if there is a shortage or deficiency on your escrow account, or if the escrow account balance becomes negative. HUECU will always make escrowed tax and insurance payments before they are due, regardless of the balance of the escrow account. Any shortage and/or deficiency will be spread over 12 months.