What's the Deal with Escrow?

You've just closed on your home. Now comes the part many first-time homeowners find confusing: managing your escrow account. 

If you're like most new homeowners, escrow is probably included in your monthly mortgage payment. Understanding how it works can help you avoid surprises and potentially save money.

Think of your escrow account as a savings account managed by your lender. Each month, you pay a set amount into this account. When your property tax and insurance bills come due, your lender pays them directly from this account. This means you don't have to come up with large lump sums twice a year for taxes or insurance. Instead, you pay a little bit each month, and your lender handles the rest. Your escrow payment can change year-to-year and it's important to pay attention to the numbers. It can save you money in the long run!

At least once a year, your lender will send you an escrow analysis statement. This statement shows how much money went into your escrow account and how much was paid out. It also tells you if your monthly payment needs to change for next year.

How Escrow Works in Minnesota

In Minnesota, you typically pay property taxes twice a year and insurance once a year. Your escrow account spreads these costs evenly across 12 months so you never face a huge bill all at once.

Here's a simple example:

• Property taxes: $3,600 per year ÷ 12 months = $300/month
• Homeowners insurance: $1,200 per year ÷ 12 months = $100/month
• Total escrow payment: $400/month (added to your mortgage payment)

Your lender also keeps a small cushion (usually two months' worth) in your account. This cushion ensures there's always enough money to cover your bills, even if costs go up slightly.

What Causes an Increase in Escrow?

The two biggest factors that cause your escrow payment to change are:

1. Property taxes: Your county charges property taxes based on your home's value. When home values or tax rates change, your property taxes can go up or down. 
2. Homeowners insurance: Your lender requires you to have homeowners insurance. This protects both you and the lender if something happens to your home. Insurance costs can go up due to inflation, local weather events, or changes in your coverage.

What Your Escrow Statement Shows

Your annual escrow statement includes:

• Starting balance: Money in your account at the beginning of the year
• Money collected: What you paid in over 12 months
• Money paid out: What your lender paid for taxes and insurance
• Next year's costs: What your lender expects bills to be next year
• Your new payment: Your monthly escrow amount going forward
• Surplus or shortage: Whether you paid too much or too little

If you didn't pay enough (shortage): Your lender will increase your monthly payment to make up the difference over the next 12 months.

If you paid too much (surplus): Your lender will refund you (if it's over $50) or lower your monthly payment.

How to Review Your Escrow Statement

When you receive your escrow statement, take these steps:

Review Your Property Taxes

• Did property values go up in your neighborhood? When home values go up, property taxes usually go up, too. This is normal and affects everyone in your area.
• Did a levy pass this year? School or city levies increase property taxes for all homeowners in that area.
• Is there a special assessment against your property? Check your statement for unexpected charges like repair fees, unpaid bills, or city fines. You can often resolve these by contacting your city or county.

Shop Your Homeowners Insurance

One way to control costs is to check your insurance rate every year. If your rate increased, contact your insurance agent to check for any discounts, see if adjusting your deductible could lower your rate, or confirm if your coverage matches your needs. It’s also worth getting quotes from other insurance companies to compare.

You can change your homeowners insurance provider at any time. Just let your lender know so they can update your escrow account.

Stay Current on Your Payments

Keep up with your mortgage and escrow payments each month. If you fall behind, your escrow won't be updated properly. This makes the problem bigger over time. The longer you wait, the harder it becomes to catch up.

Your lender can help you understand your mortgage and escrow statement. They will respond to your questions within a couple of weeks if not sooner. If you have questions about why your payment changed, challenging your property tax amount, getting a better insurance rate, or your rights as a homeowner, call your mortgage lender. They must respond within 15 business days. 

If you have a TruePath Mortgage from TCHFH Lending, Inc., your loan officer can walk you through your statement anytime.

Your Rights as a Minnesota Homeowner

Minnesota law protects homeowners with escrow accounts:

• After seven years: You may be able to stop using escrow and pay your own taxes and insurance. (This applies to some conventional loans.) Your lender will notify you if you're eligible.
• Interest: Your lender must pay you interest on your escrow balance.
• On-time payments: Your lender must pay your taxes and insurance on time or they can face penalties.

Escrow doesn't have to be complicated. Once you understand how it works, you can take control of your homeownership costs and avoid surprises. Check your statement each year, shop your insurance, and reach out for help when you need it.