Escrow Account Review

Those of us who have mortgages will receive an extra page with this month's statement. When you make your monthly mortgage payment, you're paying principal and interest, plus one-twelfth of your annual property tax and homeowner's insurance (PITI). The tax and insurance payments go into an escrow account and the mortgage lender pays your taxes and insurance when they are due.

Each year, your mortgage lender reviews the escrow account to determine whether your payments into the escrow account will be sufficient to pay the bills. This escrow account review is the extra page in your December statement.

The mortgage lender provides a list showing how much they expect to receive from you each month next year for your escrow account. They will also list anticipated payments they will make for tax and insurance. Half of your annual property tax will be paid in April, and half will be paid in October. One whole year's insurance premium will be paid on the anniversary of the month you received your home loan.

Most months, there will be money left in your escrow account. During the months when the property tax is paid, the escrow account balance may drop into the red. The lender, of course, doesn't like this, because they will have to pay part of your property tax with their own funds. They'd rather keep the balance comfortably above zero.

If the escrow account analysis shows the balance will fall below zero, the mortgage lender will divide the lowest projected negative balance by 12 and add that amount to your mortgage payment. Fair enough.

What I don't like is the reserve requirement, which, you will find, is not a requirement at all. My statement from my lender says "Federal law allows for the collection of a reserve amount to maintain a cushion for unexpected tax and/or insurance increases and other costs". To calculate the reserve amount, the lender first adds up the total payments they expect to receive from you next year for tax and insurance. These total payments are called the base amount.

The maximum amount of reserve amount the lender can collect is one-sixth or 16.6% of the base amount, equivalent to two months' of taxes and insurance.

Back when my mortgage lender was collecting the reserve amount on my loans, my escrow account always had at least a few hundred dollars in it. This is my money, and I decided I'd rather have it in my bank account than my lender's. A few years ago, I called my lender and told them my taxes and insurance have never increased 16% in one year, and I didn't want to pay this reserve amount.

I thought they would agree to make the reserve amount a smaller percentage of my base amount. To my great surprise, they agreed to reduce my reserve amount to zero. Even more surprising, they have permanently changed my reserve amount to zero. I don't have to call them every year to ask them to make this change.

So give it a try. Call your lender and tell them you don't want them charging you 16% of your base amount for the reserve amount. Let me know what they tell you. Good luck.