Escrows can be confusing, so here are some key points to consider:
- On your closing date, your home must be fully insured.
- Your insurance bill and your property tax bill will come due every year.
- Your escrow account is designed to accumulate funds so your lender can pay these bills on your behalf.
- Your lender is allowed a 2 month cushion, but not more than that.
At closing you pay for the entire 1st year’s Homeowner’s Insurance Premium, and 1 year later the premium will be due again. The escrow account will accumulate funds and pay the annual premium every year.
Property Tax Bills in North Carolina are sent out in July or August, with a September 1 due date, but can be paid as late as January 1st. There is no discount for paying the bill early, and so most lenders pay them in November or December.
Lenders are allowed a 2 month cushion of funds in your escrow account, because tax bills and insurance bills go up over time. A calculation is done to determine the cushion needed based on the inflow and outflow of funds. The Initial Escrow Deposit at closing prefunds the escrow account so that at it’s lowest balance of the year, the escrow account still has the allowed cushion. An Initial Escrow Account Disclosure Statement will be provided at closing to show you the projected flow of funds into and out of the escrow account – an example is at the bottom of this page.
In the example below, the annual insurance premium is $1646.04 and the annual property tax bill is $3483. These total $5129.04 and 1/12th is $427.42 – and so $427.42 is collected with your mortgage payment each month and is added to the Escrow Account Balance.
You can see below that at closing, a $2200.74 deposit was made into the escrow account. And the lowest balance of the year occurs once the tax bill is paid. The cushion below is $854.84 – exactly 2 x $427.42 = the required 2 month cushion.
Lenders will also send you an updated Escrow Account Analysis once a year, and if the lowest account balance exceeds the allowed 2 month cushion, lenders are required to refund the overage to you.
Unfortunately, tax and insurance bills tend to go up, and so the Escrow Account Analysis you receive is more likely to show that the Escrow Account is a little short, and so your lender will give you some options to correct the balance.
Frequently Asked Questions – All About Escrows
Do I have to escrow?
If you have an FHA loan, or if your loan has mortgage insurance, yes, you will have to escrow. But if you are making a 20% or larger down payment, in most cases you will have the option to waive escrows. There is a one time fee at closing of .125% to .250% of the loan amount to do this, the amount varies. If your loan amount is $400,000, then the escrow waiver fee would be $500 to $1000. The vast majority of my clients decide to escrow, for the convenience & to avoid the escrow waiver fee.