When it comes to a homeowner’s finances, few words evoke more worry and uncertainty than “escrow.” Fear not—your banking team can help. In this Q&A, Dana Atkins, SunTrust Vice President of Client Delight, and Kim Davis-Wiley, SunTrust Group Vice President, Escrow Analysis, Taxes and Insurance, answer some of the most common questions about escrow.
How does escrow work?
Atkins: For expenses like property taxes and homeowners insurance, the tax office or the insurance company requires a lump sum payment, so escrow allows you to make smaller, more manageable payments each month, which your bank will hold for you until they’re due annually.
How is escrow calculated?
Davis-Wiley: The escrow account includes a payment for the different kinds of insurance you have—homeowners insurance, maybe flood and windstorm insurance—and your property taxes. We divide the annual bill of each item over 12 months, and consolidate them into one monthly escrow payment that is added to your monthly mortgage payment.
Why do escrow payments sometimes change from year to year?
Davis-Wiley: Typically tax and insurance bills change each year. Your property taxes may be increasing due to rising assessed values; this means the value of your home is increasing. Your insurance may be increasing, possibly because your town or county has enacted a law that you need a certain amount of natural disaster insurance.
Atkins: It can be hard to make sense of these changes. You get the letter that your taxes are going up, but you don’t get the escrow statement with the new amount on it until months later. That disconnect can be confusing.
What are overages and shortages, and how do they affect the homeowner?
Davis-Wiley: Your escrow account is reviewed annually to ensure funds are available to pay your insurance and property taxes. An overage means the escrow projection based on taxes and/or insurance previously paid or estimated was higher than what was actually owed, so you’ll receive a check back for any extra monies. A shortage is the other end of that spectrum, where we thought you would owe one amount and you actually owed more.
If there’s a shortage, most lenders provide at least two choices: pay the shortage in full, or have it spread over a year. The shortage is typically spread over 12 months and collected with the mortgage payment. The most difficult thing to understand is that once the shortage is repaid, the mortgage payment is not reduced to the original amount as it now reflects the higher bill. Having a shortage doesn’t mean you did anything wrong, as most loans have escrow shortages due to rising bills. Just be aware that a shortage equates to an increase in the monthly mortgage payment.
How can people stay on top of their escrow?
Davis-Wiley: Homeowners can review their property tax and insurance bills for increases so they are aware of changes. There are opportunities to possibly lower your escrow bills by appealing your tax assessed value (if the figure is incorrect or too high), applying for exemptions offered by the taxing locality or switching insurance companies.
Atkins: Just understand the different factors at work. Yes, there are borrowers who track their escrow and know ahead of time that they’re going to come up short. But for most of us, it’s just about recognizing this potential for change.
Still have questions? Watch this quick video on escrow, or contact your local loan officer for more help.