Escrows basically force a homeowner to budget for those pesky property taxes, hazard insurance premiums, and mortgage insurance. It's commonly understood that the mortgage lender collects a prorated amount each month along with the loan payment, and then pays those bills directly when they are due.
Homeowners can make mistakes, causing errors in escrow payments.
But even though the lender takes on the responsibility of ensuring on-time tax and insurance payments, the homeowner should always remember to notify the lender if they learn of a change in their expected tax or insurance bills.
My personal experience serves as a great example:
I was the first owner of my newly-built house, so my property taxes were based on undeveloped land, and very low for the first 18 months. I didn't think to notify the mortgage company when I recieved the new tax assessment from the county; I thought they would find out eventually. Well, they found out right about the time the taxes were due, and had no time to collect the prorated amount in advance. So I was given the option to either pay a lump sum of about $1180 or spread the payments over time.
My escrow payment had already increased significantly when the mortgage company learned of my new-and-improved tax assessment. And then they wanted to increase my monthly payment even more until I made up the shortage with catch up payments. I happened to have the money to pay it off right away, and the higher monthly payment for many months may have caused a budgeting problem for me. So I paid it off in one lump sum.
So even though an escrow account helps to take much of the hassle out of making tax and insurance payments, it's still necessary for the homeowner to be aware of those expected bills, and to make sure that the lender knows about any changes. The whole purpose of escrow is to assist in budgeting for those expenses over a year's time; it's difficult for the lender to know how much to collect if they don't even know what those bills will be.
Mortgage lenders can make mistakes, causing errors in escrow payments.
Always review your statement carefully if you receive a notification of a change in your escrow payment. Refinancing through another lender may present an opportunity for someone to mix up numbers and miscalculate your monthly escrow payment. Even if you didn't refinance your loan, your mortgage may change hands if your lender sells your loan to another lender; mistakes are common when a different institution takes over where the other one left off.
I have another personal experience to use as an example:
A new mortgage company took over my loan last November. Two weeks ago, I received notice that my escrow payment was going up by almost a hundred dollars a month. Not able to understand why they would need to collect $400 a month in escrow when my tax bill and insurance premiums totaled about $3300 annually, I gave them a call.
The first escrow "specialist" I spoke to told me that there was a shortage in escrow when they took over the account back in November. They said they paid the tax bill out of their pocket, and that I now owe them to make up for it. What they said made no sense to me; my PITI has been the same since the previous mortgage company adjusted my escrow payment some time ago, and I never again heard anything from them about a shortage.
The specialist quoted me numbers and payment dates that made them sound like they knew what they were talking about. They talked down to me as if I were a misinformed homeowner who's just upset about paying a bigger house payment. Well, I persisted in my argument about the increase, and was transferred to an escrow supervisor. No answer; I left a message. No return phone call; I called back a few days later. No answer; I didn't leave another message. I finally received a return call a week after the original phone call.
The supervisor went on to reiterate what the specialist said. Then I told them I had this year's tax bill right in front of me, and that there couldn't be a shortage. We finally got to the problem when I quoted the numbers on the tax bill, and they realized that they had miscalculated my annual property tax bill. The mortgage company was trying to collect twice the amount of my annual taxes!
The confusion started when they somehow thought that the amount of my semi-annual tax was supposed to be the amount of the total annual tax. My tax payments are due in July and November every year, and each payment is for exactly half the annual tax bill. I don't know if the previous lender put off paying last year's first semi-annual payment, leaving the entire year's payment up to this lender in November when they took over. That may have caused them to think that last November's payment was just a semi-annual payment. I didn't really push to find out, since I was so relieved that my PITI was not going up. I'll be sure to ask when I speak to them again.
Yes, I have to speak to them again, anyway. The supervisor wanted me to fax over my tax statements right away so they can fix the problem and recalculate the escrow payment. I checked on-line the next day and saw that my escrow payment was lowered to $185, which is $176 lower than I have been paying to escrow all this time. So I must have been paying too much to escrow ever since the previous mortgage lender adjusted my escrow payments.
But today I received a phone message from the supervisor saying that a check for eight hundred and some dollars was mistakenly sent to me as a refund, and that I should destroy the check. I should expect a phone call from the supervisor some time "after they have a chance to clear things up." So the problem isn't resolved, but I know they already have plenty in escrow to cover my tax and insurance bills.
At the pace they work, it could possibly take a few more weeks for me to know what is really going on. I'll be sure to update this article when I find out.
Update...
Just recieved my new payment coupon book. It still has the $185 a month escrow payment. I tore up the check I received a few days ago, as I was directed. I think every thing is back on track, at least for this year. They'll probably make another adjustment to the escrow payment when the new tax year starts. I'll make sure to pay better attention to what my actual tax and insurance expenses are next time around.
I didn't find out about how the mix-up happened to begin with; they never called me back. I'm sure they'll just blame the mistake on the last mortgage company anyway. But learn from my mistakes; take the time to ensure your mortgage company is taking out the right amount for escrow.