Understanding Escrow Accounts and Your Mortgage Payment

If you’ve ever bought a home, you’re likely familiar with the multitude of documents that need to be signed at the closing. Within those documents is an important piece of information that explains your mortgage escrow account. Chances are you didn’t read the escrow information in all the excitement of buying your new home. Don’t worry, you’re in good company.

A recent survey conducted by financial services consulting firm LERETA reports 80% of homeowners have an escrow account. While 80% of those surveyed said they comprehend what an escrow account is, a little over half said they don’t fully understand how their escrow account works. More than a third of respondents believed their mortgage payment wouldn’t change, and 53% were surprised and did not expect it when their monthly payment increased. So, what factors contribute to a change in your monthly mortgage payment?

Every year, First Commerce and other mortgage lenders are required by regulation to send a notice to mortgage holders called a Tax and Insurance Account Disclosure Statement. It’s a four-page document that shows the month-by-month totals in your escrow account during the previous year, including when money was disbursed for insurance and taxes, a good-faith estimate of what these charges might be in the upcoming year, whether the account is running a deficit, and what your payment will be for the upcoming year. To assist members with understanding their escrow statement, First Commerce also includes a page with definitions of accounting-related terms and how to read the statement.

The month in which you receive your account statement depends on where you live, but it’s usually near the end of the calendar year. Escrow statements can often generate questions, so to assist members, First Commerce has compiled answers to the most commonly asked questions to help you better understand changes to your escrow and potential impacts to your monthly mortgage payment.

First, some explanations: If your loan has a fixed rate, the Principal and Interest (P&I) on the money you borrowed will not increase throughout the life of the loan. What is changing is known by another acronym — T&I — which stands for Taxes and Insurance.
Local property taxes and home insurance premiums can fluctuate from year to year, and in recent years, these costs have been on an upward trend. Property taxes and insurance are payable annually. For the convenience of mortgage holders, First Commerce and other lenders establish an escrow account that allows you to save for annual tax and insurance expenses over time.
To determine how much to set aside in escrow, loan analysts project what the homeowner’s property taxes, and insurance expenses may be for the coming year. They then calculate a monthly amount to set aside in escrow that gets added to your monthly mortgage payment. The money is set aside in a special, non-interest-bearing account and saved throughout the year so those bills can be paid when they are due. Escrow accounts are a helpful tool to avoid having to make a sizeable lump sum payment all at once for annual property taxes and/or home insurance.
Property Taxes. Homeowners pay property taxes assessed by their local government to help fund public services such as schools, libraries, roads, parks, fire protection, and emergency services. The amount you pay in annual property tax is based on your property’s assessed value and the local government’s tax rate, which varies by area. To learn more about your local property taxes, visit your county tax official’s web site.Homeowner’s Insurance. When financing a home through a mortgage lender, buyers are required to have home insurance in the event your home or property is damaged.
Private Mortgage Insurance. If your down payment on a conventional mortgage is less than 20% of your property’s value, you will be required to have what’s known as PMI — Private Mortgage Insurance. PMI protects the lender’s investment in the event you are unable to make your mortgage payment. Learn more about PMI through the FCCU Foundation’s free SmartMoney Online web site.
Flood Insurance. If you live in a flood-prone area, you may also be required to purchase federal flood insurance, which can be included in the T&I.
In recent years, the threat of disastrous hurricanes, floods and other storms has caused some insurance companies to re-evaluate the cost of providing coverage. Other insurers have discontinued providing coverage in certain areas altogether. Consequently, the cost of property insurance has risen across many areas.
Property taxes have also seen increases. According to a Bloomberg report, in 2023 homeowners saw some of the largest increases they’ve seen in five years. Usually, property taxes increase by small amounts year-over-year, but there are some scenarios where local taxes can greatly increase.
Estimating property taxes is usually based on what was paid in the previous year. If you recently bought a house, that projection is based on taxes the former owners paid — and they may have had exemptions you don’t qualify for. Your new home was appraised before you purchased it and the new value may be much higher than it was for the previous owners.
If your insurance and/or property taxes for the year end up being higher than the amount collected through your escrow account, the result can be an escrow underpayment. If this happens, First Commerce will pay your tax and insurance payments for the year and then work with you to collect the shortage – either by adding the difference into your monthly payments for the upcoming year, or by allowing you to pay the difference in full upfront. If you choose to add the difference into your monthly escrow payments for the upcoming year, your overall payment will be adjusted. Members with a First Commerce mortgage can choose to reimburse FCCU for the full amount with a one-time payment to avoid having it added to the following year’s escrow.
No escrow account. When buying a home, you may have the option to waive the escrow for your property taxes and/or homeowners’ insurance. In this case, your monthly payments on a mortgage with a fixed interest rate will not fluctuate. However, without an escrow account, you will be responsible for setting aside enough money to directly pay your property taxes and home insurance each year by the due date. It’s important to remember that if you should miss paying these bills, you will automatically be required to switch to using an escrow account for the remainder of your loan.
PLEASE NOTE: The National Flood Insurance Act requires properties in a flood zone to have flood insurance collected in an escrow account. Additionally, PMI is required to be escrowed.
Shop Around for Home Insurance. If you use an escrow account to pay your annual insurance and tax bills, you may be able to lower your monthly mortgage payment by shopping around for better rates on your homeowner’s insurance. Any savings in insurance may help reduce your monthly mortgage payments. If there is any leftover money in your escrow account after the annual bills have been paid, overages above $50 will be reimbursed to you.
Evaluate Private Mortgage Insurance. The average annual cost of PMI typically ranges from 0.46% to 1.5% of the loan amount, depending on your credit score. If you pay PMI, you should periodically assess the value of your home to determine if you are below the 80 percent threshold. Once your mortgage principal balance is less than 80% of the original appraised value, you can ask your mortgage lender to cancel PMI. There may also be additional requirements, such as a history of timely payments and the absence of a second mortgage. If you don’t request cancellation, the lender is required to cancel PMI once your mortgage balance reaches 78% of the original value of the home, or you reach the halfway point through the loan’s original term.

Understanding how mortgage escrow accounts work can be daunting if you are unfamiliar with the terms and the way they are set up and managed. First Commerce offers a variety of resources to help you make informed decisions about managing your mortgage and escrow account.
For members with a First Commerce mortgage, the Mortgage Portal provides a variety of helpful resources to help manage your mortgage effectively. Features include payoff requests, essential annual documents like 1098 and T&I disclosures, adaptable payment arrangements such as an escrow-only option and access to an amortization calculator. The Mortgage Portal is also available through digital banking.
Additional information about mortgages, insurance and home ownership considerations is available through the FCCU Foundation’s SmartMoney Online web site.