Most mortgages financed in the last 10 years include something called escrow. And all that escrow is, is a monthly payment to cover the taxes and insurance on your home. Instead of paying your insurance twice a year when the payments are due, or having to worry about a large tax bill at the end of the year, the mortgage company takes care of the payments for the taxes and insurance, and breaks down the annual liability into more manageable monthly payments.

The mortgage company does this for two reasons – they can ensure that the taxes and insurance are being paid on the house, so there will never be an issue where the house is seized due to unpaid taxes or destroyed in an accident and unrepaired due to an insurance lapse. The other reason is that it makes your life easier – you no longer have to worry about large, lump sum payments.

And while this first part is all pretty easy to understand, reading an escrow summary sheet can be like reading Latin for many homeowners. To understand what you are looking at every year, it is important to understand what each term means.

First, there is a breakdown of each escrowed item – this could be the homeowner’s insurance, flood insurance, and taxes. The total of these are added together and divided by 12 to determine your monthly escrow payments.

Next, there is a breakdown of the escrow balance, minimum escrow, maximum, escrow, and total escrow payments. The escrow balance is one of two things – on a newly purchased house, this will be the amount placed in escrow at closing. On an existing home, this is the amount left in escrow at the beginning of the new year. The minimum escrow balance is an amount your escrow may not fall below; the number is usually set by the state based upon the size of the monthly escrow payment. The maximum escrow is the highest amount of money which can be held in escrow for your home throughout the year, based upon the payment schedule. Finally, the total escrow payments is the total of the 12 monthly payments.

If you have any questions about calculating your escrow, or about mortgages in general, please contact me. If you have anything to ad about calculating escrow, please leave a comment.