Escrow Minimum Balance

[Adam DuCharme]

My mortgage was sold to another institution last year and it seems like they handle escrow differently. My previous bank would pay the taxes and insurance when due and collect those balances equally throughout the year. So my escrow account could technically be negative for some of the year if, for example, taxes are collected halfway through the year but everything would be settled by the end of the year. My new bank requires that requires that I have a positive balance of 2 months escrow payments in my account at all times, meaning my account is a few thousand dollars "behind" on this balance. To fix this, the bank has added a shortage payment to my monthly mortgage until that positive margin is achieved. However, increasing insurance rates means that this shortage is also increasing so my monthly payment is increasing exponentially to accommodate the increase in both my insurance rate and my shortage (my mortgage has increased over $400 monthly in the past 1.5 years because of these factors).

TL;DR - Is it normal for a bank to require a positive escrow balance at all times like my current bank does? Or do most banks only charge escrow based on payments for that year like my first bank did?

[Patrick Roberts]

2 months of reserves in escrow for taxes and insurance is normal. If there is a shortage when either item is paid, the servicer will pay the amount due and increase the mortgage payment to cover the shortfall. The increase will be enough to A) repay what the servicer "lent" to you to cover the shortage, and B) cover the increased tax and/or insurance amount going forward. I would expect your payment to drop in about 12 months when the shortage portion is repaid. Alternatively, you could reimburse the account shortage now and ask for an escrow re-analysis based on the new tax/insurance annual payments.

Check your closing disclosure from when you purchased. Part of your prepaids and reserves should have been 2 months of tax and insurance escrow paid in at closing, in addition to collecting the annual insurance premium and expected taxes due for the year in which you closed. If you don't see these items, then this is the origin of your problem. Some brokers/lenders do this intentionally to give false appearances when trying to compete - "See, look how much lower my cash to close is compared to that guy."