What is an Annual Escrow Analysis? What is an Annual Escrow Analysis?

Your annual escrow analysis is an annual review to confirm that payments towards your anticipated property tax and insurance over the coming year will be sufficient to cover those costs.

How May An Escrow Analysis Impact Your Mortgage Payment?

When purchasing your home, budgeting for your monthly mortgage payment should be a primary consideration in determining what property you can afford and where you can afford to buy. The portion of a monthly payment attributable towards principal and interest may remain unchanged depending on the loan. However, it may come as a surprise to first-time homeowners in particular that your  monthly payment may change from year-to-year due to the portions attributed towards paying for escrowed items, like property tax and homeowners’ insurance. 

Every year, your mortgage servicer will review the escrow account that was set up when your loan was originated to ensure the amounts being collected are still sufficient to pay for your property taxes and homeowners’ insurance premiums in the coming year. If these costs for property taxes and homeowners’ insurance change, then your monthly mortgage payment will change accordingly. This annual review and any resulting changes to your monthly payment will be summarized in an annual escrow analysis statement sent to you by your servicer. Below we'll cover what an escrow analysis is, how to read it to determine whether your monthly payment could be changing, and more. 

What is an Escrow Account?

Before we dive into the ins and outs of escrow analysis statements, let's briefly cover the basics of escrow accounts and how they factor into your monthly mortgage payments. Generally, your monthly mortgage payment amount will be comprised of payments towards principal, interest, property taxes, homeowners’ insurance, and if applicable, private mortgage insurance (PMI). The portion of your payment that includes your property tax and insurance is paid into a mortgage escrow account, also known as an impound account. Your servicer will use the funds paid into this account to ensure that your property tax and insurance payments are made on time. This helps to avoid liens on your home or having to take out additional homeowners' insurance. 

Homeowners have a monthly escrow payment based on their estimated annual property tax and insurance premiums (which are both subject to change throughout the life of their loan -- more on that below). When you close on your home, you can expect to pay up to two months' worth of property taxes and insurance that are directly applied to those costs in the future.  

What Is an Escrow Analysis Statement?

This statement provides insight into the assessment of your escrow account and any resulting changes to your monthly payment. Every month, your mortgage servicer will make available a statement showing your current escrow account balance. Annually, (usually in May), mortgage servicers are required to send you an analysis statement. Below are some of the most common elements that might appear on your analysis statement:

1. Escrow Activity Summary: The escrow activity summary features a breakdown of the factors used to determine any changes to your monthly payment. This includes all expected and actual transactions during the previous 12 months.
2. Escrow Projection Summary: This section includes an estimate of activity in your escrow account during the coming year based on anticipated payments. The projection summary outlines projected payments, disbursements, and account balances for the next 12 months.
3. Projected Disbursement Summary: The Projected Disbursement Summary is the projected amount of property taxes and insurance to be paid over the coming 12 months based on what was owed during the previous year. 
4. Escrow Analysis Summary: The Escrow Analysis Summary details whether the analysis indicates a projected surplus, shortage, or deficiency of funds to cover your expected property tax and insurance premium payments.
5. Payment Change: The Payment Change section identifies the difference between your previous payment and your new payment. It includes a breakdown of your old and new principal, interest, escrow, and total payment.
6. Escrow Shortage Payment Notice: This section indicates if your escrow account has a shortage for the amount listed. 

For more information, be sure to check out our detailed breakdown of what appears on a Leader Bank Escrow Analysis Statement. 

Ways to Lower Your Monthly Mortgage Payment 

If you receive your escrow analysis and there is a shortage amount (one cause for your mortgage payment increasing over the coming year), you may be wondering how you can keep your monthly payment from increasing due to that shortage or otherwise lower your payment. The good news is that there are a few ways you can go about reducing your mortgage payment:

1. Shop Around for Homeowners’ Insurance: If you receive your escrow analysis and see that there is a shortage leading to your mortgage payment increasing, you'll be able to determine if the shortage was due to your property tax or insurance costs increasing. If you have an escrow shortage resulting from your insurance premium becoming more expensive, you can always shop around for a better deal with another provider. If you recently made home improvements that addressed safety concerns with your home your insurance provider may also reduce your premium. 
2. Refinance: If mortgage rates have fallen since you closed on your home, reaching out to your lender about refinancing could help offset any increase to your mortgage payment as the result of an escrow shortage. 
3. Eliminate PMI: If you made a down payment of less than 20 percent when purchasing your home with a conventional 30-year fixed mortgage, your lender more than likely required that your loan come with private mortgage insurance. PMI is another cost that is paid into your escrow account every month. If you have at least 20 percent equity in your home, you can reach out to your lender to discuss terminating your PMI insurance.