As a homeowner, you've likely encountered the term "escrow," particularly in relation to your mortgage. But what exactly is a mortgage escrow account, and how does it function? This article will demystify escrow accounts, explain their purpose and how they help you.

What is Escrow Account?

An escrow account is a bank account used by M&T to hold and disburse funds for your property taxes and homeowner’s insurance premiums as they come due. Budgeting for large expenses like these can be difficult, so escrow accounts simplify the process by spreading these expenses over the entire year. Ensuring these expenses are paid on time helps to safeguard both your home and the lender's financial interests. 

How Escrow Works

When you make a mortgage payment, it typically includes two components: the principal and interest, which remains constant with a fixed-rate loan, and the escrow payment, which will vary based on your changing tax and insurance costs. M&T deposits the escrow portion of your payment into your escrow account each month and disburses funds from the account when your bills come due. 

Another benefit of having an escrow account: Even if your taxes or insurance premiums rise unexpectedly and there are not enough funds in your account to cover the bills, M&T will still pay the full amount when it is due and you will be able to pay back the difference later.* This helps prevent potential lapses in insurance coverage or delinquent property taxes which could put your home at risk.

Are Escrow Accounts Required?

While there’s no law requiring an escrow account, many loan programs require them as a condition for receiving the loan. Nationally, according to a 2024 survey, 80% of mortgage holders have an escrow account. 

How Are Escrow Payments Calculated?

Your escrow payment is determined by estimating your annual property taxes and home insurance costs and dividing this total by the number of mortgage payments you’ll make in the coming year. 

For existing homeowners, these estimates are typically based on the previous year's expenses. For those who have purchased their home in the last year, the estimates are taken from their loan closing documents. So, if you’ve just purchased your home, it’s a good idea to confirm the estimates are based on the improved value of your property (in the case of a newly constructed home) or that they don’t assume any tax exemptions, enjoyed by the previous owner, will carry over to you.

Your escrow account may also require a minimum balance be maintained, typically equivalent to two month’s escrow payments. So assuming you make a single payment each month, your escrow payment would be calculated as follows:

(Annual expenses ÷ 12) + any additional funds needed to maintain a minimum account balance throughout the year = monthly escrow payment.

What Is an Annual Escrow Analysis?

Each year, M&T will perform an escrow analysis to determine if the escrow payments being collected are sufficient to cover your actual tax and insurance expenses.

An escrow surplus, or overage, occurs when you’ve paid more than required to cover your tax and insurance obligations. If there's a surplus of $50 or more, you’ll normally receive a refund check. Otherwise, the overage will be applied toward your next mortgage payment.

Conversely, if there's a shortage, it means the escrow funds collected were insufficient to cover your expenses, often due to increases in your taxes or insurance premiums. In the event of a shortage, you have two options: 

  1. You can pay it back over the next 12 months as part of your new escrow payment
  2. Or, you can pay the shortage in full, minimizing the increase in your new payment. It’s important to note however, your payment will still need to increase as your annual tax and insurance expenses have gone up

Understanding how your escrow account works can provide greater confidence when managing your home finances. It ensures some of your most critical bills are paid on time and helps smooth out the burden of making large lump-sum payments.

*M&T will only send an escrow shortage coupon if the shortage is less than one month's escrow payment. In the event the escrow shortage is more than one month's escrow payment, the analysis statement and monthly billing statement will reflect the shortage spread out over 12 months and added to your monthly mortgage payment. You may also choose to pay the shortage all at once and your payment will be adjusted.

This content is for informational purposes only. It is not designed or intended to provide financial, tax, legal, investment, accounting, or other professional advice since such advice always requires consideration of individual circumstances. Please consult with the professionals of your choice to discuss your situation.

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