Congratulations on purchasing your new house! We’re pretty sure you’re still feeling over the moon as you savor this exciting development, and as you slowly familiarize yourself with the nuances, quirks, and every bit and piece of your new home, we hope that you’ll also sit down and learn more about your annual escrow statement and home mortgage as well.

An escrow account is a special account set up by your mortgage provider where a portion of your monthly mortgage payment goes into. Then, once the time comes, the mortgage provider takes out whatever is in that account to pay for your taxes and insurance.

Inside an Annual Escrow Statement, you’ll see the following:

Escrow Balance

This is usually located toward the top of your annual escrow statement. Every month when you make your mortgage payment, a portion goes into this account. Your lender then pays the taxes and insurance on your behalf. Therefore, they will include the amount in that account (current escrow balance) and indicate the amount they actually had to pay (required escrow balance).

How Escrow is Calculated

Apart from your actual escrow balance, one thing you have to check is the breakdown of how much is required for taxes and how much is required for insurance each month. The costs of these two will be combined, and a monthly escrow payment will be created. One thing you have to note is that this amount is included in your monthly mortgage payment, not separate.

What Happens if Your Current Escrow Account is Not Enough?

If the required escrow amount on your annual escrow statement is greater than the current escrow amount, you will need to make up that difference. Luckily, most lenders automatically adjust your monthly payment for the next year to make it up. Of course, they’ll let you know what your new monthly payment will be. You don’t have to worry about facing an astronomical amount. The increase is not usually a significant amount because it is spread out over 12 months. Alternatively, you have the option to pay the difference as a one-time payment, depending on the lender.