Escrow payment is the common term referring to the portion of a
mortgage paymentthat is designated to pay for real property taxes and hazard insurance. It is an amount "over and above" the principal and interestportion of a mortgage payment. Since the escrowpayment is used to pay taxes and insurance, it is referred to as "T&I", while the mortgage payment consisting of principal and interest is called "P&I". The sum total of all elements is then referred to as " PITI", for "Principal, Interest, Tax, and Insurance". Some mortgage companies require customersto maintain an escrow account that pays the property taxes and hazard insurance. Others offer it as an option for customers. Some types of loans, most notably Federal Housing Administration(FHA) loans, require the lender to maintain an escrow account for the life of the loan.
The monthly escrow payment is calculated by taking the total of all anticipated tax and insurance disbursements for the coming year, and dividing that number by 12. In addition, if the mortgage company requires a minimum balance in the escrow account (usually no more than double the monthly escrow payment), they may add on a shortage adjustment so that the balance never falls below the minimum balance requirement. If, even at its lowest point, the escrow account has a projected balance greater than the minimum balance requirement, federal guidelines—the Real Estate Settlement Procedures Act of 1973 (
RESPA)—require that the mortgage company refund the difference to the customer.
Even with a fixed
interest rate, monthly mortgage payments may change over the life of the loan due to changes in property taxes and insurance premiums. For instance, if a hazard insurance premium increases by $120.00 per year, the escrow payment will need to increase by $10.00 per month to account for this difference (in addition to collection for the resulting escrow shortage when the mortgage company paid $120.00 more for the hazard insurance premium than what was anticipated). By RESPA guidelines the escrow payment must be recomputed at least once every 12 months to account for increases in property taxes or insurance. This is called an escrow analysis.
*cite web|url=http://www.hud.gov/offices/hsg/sfh/res/respafaq.cfm|title=FAQs About Escrow Accounts for Consumers|publisher=
U.S. Department of Housing and Urban Development|date=2005-06-20|accessdate=2007-04-12
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