Definition:
An escrow analysis is a yearly review performed by a mortgage lender to ensure the amount collected for property taxes and homeowners insurance in the escrow account matches the actual costs.
Example:
Jason’s lender collects money each month for property taxes and insurance through his escrow account. At the end of the year, the lender performs an escrow analysis and discovers Jason’s property taxes have increased. As a result, Jason’s monthly mortgage payment is adjusted slightly to cover the higher cost for the upcoming year.
Explanation:
In real estate, escrow analysis is used to make sure a borrower’s escrow account has enough money to cover yearly expenses like property taxes and insurance premiums. Mortgage lenders usually conduct this analysis once a year to compare the amount they’ve collected from the borrower with the actual bills that were paid.
If the lender finds a shortage—meaning the escrow account didn’t collect enough—they may either ask the borrower to pay the difference in a lump sum or spread it out over the next year by increasing monthly payments. If there’s an overage—too much was collected—the borrower may receive a refund or see a reduction in future payments.
Lenders are required by law to notify borrowers of any changes and provide a detailed escrow analysis statement, showing how the calculations were made.
Why is Escrow Analysis Important in Real Estate Transactions?
Escrow analysis is important because it helps borrowers stay current on taxes and insurance without surprise bills. It ensures accurate, timely payments and protects both the homeowner and the lender from potential issues like unpaid taxes or a lapse in insurance coverage.
Understanding escrow analysis helps buyers budget more effectively and avoid confusion when monthly mortgage payments change, making homeownership more predictable and financially manageable.