Owning a home can be a wonderful experience, and makes for a common way to save and invest your money into something that (usually) appreciates in value. Your monthly mortgage payment doubles as a “forced savings” of sorts, and is a key component to most consumers building their wealth through a basic need (shelter). You get so used to your mortgage payment, that you may not even look at the details of what’s going where and how much you have in escrow. Take a second look and you might be surprised at what you find. In my case, I found about $4000 extra that was being held in my escrow account that I asked to be returned to me. I received my check last week after waiting for approximately 2 weeks total. Not a bad deal…but then again it is my money.
Being that we just bought our house last year, we were fortunate enough to only pay taxes on the land and not the improvements. That means our tax bill for 2007 was extremely low. Plus, our lender decided to have us pay the normal escrow amount from the get-go so that we could get used to the payments and not be surprised come 2008 with a dramatically increased payment. Sure, in hindsight we could’ve waived that extra payment but in the end it worked for us. Instead of spending that money (which we surely would’ve on house related stuff), it sat in our escrow account building up. Being that we also paid some taxes at closing time, we had a pretty big overage after the taxes for 2007 were paid.
So how much actually needs to be in escrow? Well, the answer will depend on your state and lender, but the Real Estate Settlement Procedures Act (RESPA) does limit the amount a lender can hold in escrow as a cushion to approximately 2 months of escrow payments. This amount could be even lesser depending on your state of residence or your agreement with your mortgage lender. Calculating that 2 month buffer isn’t as easy as it sounds though, the calculation is based on payment amounts and dates in order to correctly predict the amount needed at any given time of the year. There’s a great example of how to calculate the escrow buffer value at Mortage-X.com.
You may be asking why even bothering getting the money back? They give you options to keep the money in there, so why even go through the hassle? The answer is interest! It’s your own money, so the last you want to do is have your money sitting in an account that you can’t gain interest on. The money isn’t doing anything for you in escrow anyway. If your taxes go up, your payment can be adjusted to compensate. You could use that money for any number of things, it’s kind of like a bonus…that you’ve saved yourself of course. Either way, it should only take a short call (or in my case email) to your mortgage lender to get the process going. They’ll do an analysis and cut you a check if you have an overage. Pretty simple, at least in my experience.
So if you haven’t taken a look at your mortgage statement in a while, it may be worth it to glance and see exactly how much you have sitting in escrow. Otherwise you could be missing out on some interest on your hard earned money.
April 16th, 2008 at 9:47 am
My husband and I purchased our first home in January, and we went through a problem with the escrow that the bank holds as well. For us, they miscalculated our escrow by about $148 dollars a month. And it took a lot of explaining and calculations to show them what they did wrong.. In addition to miscalculating the escrow payment, they miscalculated what we had to put in to the escrow account at closing by about $1700! That’s a huge amount to us, especially as we’re making improvements, etc. in our home. So luckily I was able to catch the problem within the first month or so and we’re not giving the bank as much money from interest.