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Escrow 101

Estimated reading time: 3 minutes

What is escrow? In the simplest of terms, escrow is money that your mortgage servicer (the company you send your mortgage payment to) sets aside to pay property taxes and insurance premiums. Think of it as a sort of “piggy bank.” Every month, a part of your mortgage payment goes into your escrow account, accumulating funds until your homeowners insurance and property tax payments come due. Then, your servicer uses that money to make those payments for you.

Do I need an escrow account?

Some homeowners choose to use escrow because it’s a simple way to stay current with taxes and insurance. But often the lender requires you to have an escrow account, depending on the type of home loan you have.

  • FHA loans: The Federal Housing Administration (FHA) requires that lenders making FHA-insured loans establish escrow accounts for those loans.
  • VA loans: The Veterans Administration (VA) does not require lenders to maintain escrow accounts on VA-guaranteed home mortgages. However, the VA does require that lenders ensure that the property is covered by sufficient hazard insurance at all times and that property taxes are paid.
  • Conventional loans: With conventional mortgage loans (loans that aren’t backed by the federal government), the lender decides whether or not to require an escrow account. Most conventional loan contracts contain a clause requiring an escrow account unless the lender waives this obligation in writing.

For many homeowners, the monthly escrow deposit is a good alternative to paying for property taxes and homeowners insurance on their own.

Calculating escrow

The first thing you need to be aware of is that your monthly payments can, and usually do, fluctuate, most likely from year to year. The reasons can be either:

  • Rate changes for homeowners’ insurance premiums; and/or
  • Changes in property taxes.

Mr. Cooper performs an annual escrow analysis for customers and sends a notification of any changes in payments.

There is a standard formula for calculating escrow. The math is simple. Divide the total of your insurance premium and your annualized property taxes by 12. For example, if you owe a total of $2,400 in property taxes and $1,200 in insurance premiums:

  • That would equal $3,600. ($2,400 + $1,200 = $3,600)
  • Divide by 12, and you would have to pay $300 per month into your escrow account. ($3,600 ÷ 12 = $300)
  • That’s $300 in addition to the principal and interest portion of your monthly mortgage payment.

Another thing to keep in mind, some servicers, including Mr. Cooper, require the customer to maintain a one- or two-month cushion in the escrow account to ensure there are enough funds available should the tax or insurance bill be higher than expected. The cushion’s amount is factored into your monthly escrow payments and is paid over the year.

Have more questions about your escrow account?

If you’re a Mr. Cooper customer:

Whenever you need it, we’ll be here to help.