Applying Escrow to Late Mortgage Payments

Probably not.

Your escrow account, if it is working properly, should be calculated so that just the necessary amount is available to pay your taxes, your homeowner’s insurance, your mortgage insurance, and other such items throughout the year. Even though a large balance may appear one month before money is paid out, that money has already been earmarked to pay something important later on … and if the lender empties the account to make your mortgage payments, there will be no money to pay the other parties when the time comes.

If you are already behind on your payments, the lender is already concerned that they may eventually have to take back the house as a foreclosure. They do not want the added concern that the taxes, the insurance, or the mortgage insurance will be late and accumulating penalties, or that the house will be uninsured because the escrowed funds were depleted.

Your escrow account should also contain about 2-3 months of “cushion” or “extra” payments that were made when you first bought or refinanced the home. The lender keeps this money so that the payments to the third parties get paid on time, whether or not you make each and every monthly payment. This “cushion” is returned to you if you close out your loan (by selling or refinancing) and all parties have been paid in full – but the lender is not likely to send that money to you for any purpose until the loan is closed.

If you feel that the lender is escrowing too much money, and that there is “extra” money in the account that should be returned to you, call your lender or servicer. Most have a department that works exclusively with escrow accounts, and they will be able to do a detailed analysis of your account to make sure that everything is working as it should. Call and ask to speak to someone from the tax and escrow department, or view your escrow account online.

Here is a simplified example:

Let’s say that your taxes are $1200 per year, and that the tax bill comes 4 times per year, so $300 for each bill. Let’s also assume that your home owner’s insurance is $600 per year, and gets paid once a year.

In this example, the lender should be collecting $100 a month for your taxes and $50 per month for your insurance. $150 a month should be entering your escrow account from your payment.

When you close, you pay the first tax bill, $300, and $600 for your insurance at the table.

Your lender also collects and starts with a balance of $300 (two month’s worth of insurance and taxes).

Month 1, +150 from your payment = $450 balance

Month 2, +150 = $600 balance

Month 3 +150 = $750 balance

Month 4 +150 = $900, the lender pays tax bill two, –$300 = $600 balance

Month 5 +150 = $750 balance

Month 6 +150 = $900 balance

Month 7 +150 = $1050, the lender pays tax bill three, –$300 = $750 balance

Month 8 +150 = $900 balance

Month 9 +150 = $1,050 balance

Month 10 +150 = $1,200 balance, the lender pays tax bill four, –$300, = $900 balance

Month 11 +150 = $1,050 balance

Month 12 +150 = $1,200 balance, the lender pays Yearly Home Owners Insurance Policy –$600, = $600 balance 

Second YEAR:

Month 13 +150 = $750, Lender pays tax bill one, -$300  = $450 balance

Month 14 +150 = $600 balance

Month 15 +150 = $750 balance

Month 16 +150= $900, Lender pays tax bill two, –$300 = $600 balance … . .

 … and so on.

If the lender misses your $150 for a month or two because you do not make your payments on time, they will run out of money to pay the bills pretty quickly … so they don’t want to spend that money on anything but what it is designed to pay.