What you need to know about escrow

Have you owned your home for at least a year? If so, you should expect to receive an annual escrow statement. This statement contains a lot of important information about changes to your mortgage account. We know it can be a bit overwhelming at first, which is why we are going to answer some frequently asked questions and breakdown how to read your escrow statement.  

What is an escrow account?

When you closed on your home loan, an escrow account was created to set aside money to pay your property taxes and homeowner’s insurance. The goal of your escrow account is to help make it more manageable for you to pay these expenses. Instead of paying these bills as one lump sum, your escrow account allows you to spread the cost of your taxes and insurance over the course of a year. 

How does it work?

Each month when you make your mortgage payment, it’s divided among principal, interest, property taxes, and homeowner’s insurance. The taxes and insurance portion of your mortgage payment goes into your escrow account and your lender uses that money to pay your property taxes and homeowner’s insurance bills when they are due. 

What’s an annual escrow statement?

An escrow statement is like a bank statement for your escrow account. It shows how much you put in, how much was paid out and when. Since property taxes and homeowner’s insurance costs can change from year to year, your account is reviewed once a year to make sure you have enough in your escrow account to pay these bills. 

How do I read my escrow statement?

Now let’s break down the key components of an escrow statement. If you have received a statement, take it out so you can follow along. 

  • Payment Information: Here you can find what your current mortgage payment total is and how it is spread across your principal, interest, and escrow. You’ll also see what your new payment will be when changes become effective, which will be at least 30 days after you receive your statement.  

  • Escrow Explanation: This shows you what your taxes and insurance were anticipated to be and what they actually were for the year.

  • Shortage and Surplus Amounts: Your statement will show if you have a shortage or surplus. A shortage means you didn’t have enough money in your escrow account to cover your taxes and insurance for the year. A surplus, on the other hand, means you paid more into your account than was needed to cover your taxes and insurance. 

Why is my mortgage payment changing?

With a fixed-rate mortgage loan, the interest rate will not change over the life of the loan, so the amount you pay each month toward your principal and interest will stay the same. Your property taxes and homeowner’s insurance will likely increase over time leading to an increase in your mortgage payment. If and when this happens, your monthly payment will increase to make up for the shortage. One of the main reasons to carefully review your escrow statement is to be aware of these changes and adjust your monthly payment accordingly.

If you notice a large increase in costs, we recommend that you shop your homeowner’s insurance with a minimum of 3 different providers to find the best rate. Your property taxes, unlike your homeowner’s insurance, are calculated and set by the county accessor.  

Why Don’t I Have a Surplus if There is More Money in my Account than I Needed?

It is standard for your lender to keep a cushion of 2 months of your taxes and insurance in your account. This ensures that you will always have enough money there to protect your home and investment. If you do have a surplus of more than $50.00, your lender will issue a refund. 

What do I Need to do if I Have a Shortage?

If you have a loan with Homewise we offer you two options for paying your shortage—you can either pay it as a lump sum or break it up into payments over the upcoming year. While these options are standard for most lenders, you should be sure to contact your lender to explore your payment options. 

Want to pay it as a lump sum? You can:  

  1. Send us a separate check: You can send us a check for your shortage amount by mail, drop it off at our Albuquerque or Santa Fe office, or place it in the secure dop box outside of one of our offices.  Please make sure to include Escrow Only on the memo line, so we know that it is for your escrow shortage. 
  2. Add the shortage amount to a regular mortgage check: If you typically make your payments by check, you can add the shortage amount to your normal payment. Please be sure to add a note on the memo line with the amount that is going towards your escrow shortage.  
  3. Make an online payment: You can add it to your normal payment online under the Additional Escrow section. If you choose this option, please contact us to let us know so we can review your account and adjust your payment.   

Want to spread out your shortage? We will divide the escrow shortage by 12 months and add the cost to your monthly mortgage payment. 

Please note, if you use a third-party service to make your mortgage payments, like your bank’s automatic bill pay system, you’ll need to update it to reflect your new mortgage payment.  

More questions? Check out the videos below for additional info. 



Learn about your escrow

How to read your escrow statement and more with Nataly, Loan Servicing Advisor for Homewise

About the Author:
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Homewise helps create successful homeowners and strengthen neighborhoods in New Mexico. We do this through our comprehensive real estate and lending services designed to support working families and individuals. We are a nonprofit lender, also known as a Community Development Finance Institution (CDFI).

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