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WalletPrep worksheet · Housing

What is an escrow account on a mortgage?

Name ____________________ Date __________

Key ideas

  1. Escrow pays your property taxes and insurance. Your servicer collects a share each month and pays those bills for you when they come due.
  2. Your payment is reset once a year. The servicer reviews the account yearly. If taxes or insurance rose, your monthly payment rises too.
  3. The cushion is capped at 2 months. For most loans, the extra cushion a servicer holds can't top 2 months of escrow bills (1/6 of a year's total).

Vocabulary

Escrow account
An account your mortgage servicer uses to collect part of each payment and pay your property taxes and homeowners insurance for you.
Private mortgage insurance
Insurance a lender usually requires on a conventional mortgage with less than 20% down. You pay for it, but it protects the lender if you stop paying.
Principal
The amount you borrowed, or the part of your balance that is still owed, not counting interest.

Work it out

Lee's principal and interest is $1,600 a month. His escrow was $500 a month for $4,200 of property tax and $1,800 of insurance. Then the bills went up.

  1. New property tax
  2. New homeowners insurance
  3. Yearly escrow bills
  4. Monthly share (÷ 12)
  5. Shortage spread over 12 months
  6. New escrow payment
  7. Principal and interest
  8. New monthly payment

Check yourself

  1. Your yearly property tax is $3,600 and insurance is $1,200. What is the monthly escrow amount before any cushion?

    • A. $300
    • B. $400
    • C. $480
    • D. $4,800

  2. Your escrow review finds a $120 surplus and you are current. What must the servicer do?

    • A. Keep it for next year
    • B. Apply it to your principal
    • C. Refund it within 30 days
    • D. Nothing; it is a fee

  3. Which bill is usually paid outside escrow?

    • A. Homeowners association dues
    • B. Property taxes
    • C. Homeowners insurance
    • D. Private mortgage insurance

Your turn

Find your latest escrow statement, or log in to your servicer's site. Check that the property tax and insurance amounts match your actual bills, and note the month of your next escrow analysis.

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Answer key

What is an escrow account on a mortgage?

Work it out

  1. New property tax$4,500
  2. New homeowners insurance$2,400
  3. Yearly escrow bills= $6,900
  4. Monthly share (÷ 12)$575
  5. Shortage spread over 12 months$50
  6. New escrow payment= $625
  7. Principal and interest$1,600
  8. New monthly payment= $2,225
  1. The new yearly bills total $4,500 + $2,400 = $6,900. One twelfth is $6,900 ÷ 12 = $575 a month, up from $500.
  2. The insurer billed $600 more than escrow had collected, a shortage. Spread over 12 months, that is $600 ÷ 12 = $50.
  3. Lee's payment rises from $2,100 to $1,600 + $575 + $50 = $2,225. Paying the $600 at once would make it $2,175.

Check yourself

  1. B. $400 $3,600 + $1,200 = $4,800 a year. $4,800 ÷ 12 = $400 a month.
  2. C. Refund it within 30 days For most loans, a surplus of $50 or more must be refunded within 30 days of the analysis if you are current.
  3. A. Homeowners association dues HOA and condo dues are usually paid separately. Taxes, homeowners insurance and often PMI come through your mortgage payment.