||Ask Dr. Don
Excess escrow payments
Dear Dr. Don,
I've had my refinanced mortgage with
the same financial institution since 1999. I've kept excess money
in my escrow account, sending in extra payments for increases in
insurance and taxes with instructions on how to apply the extra
However, at the end of the year I received a check
from the lender for the amount of extra money I deposited in escrow,
but received notice that my escrow payments would increase due to
"estimated taxes" that I was aware of -- thereby the extra
payment. I was told that it was the law of this state (New Jersey)
to return to the borrower any excess money in escrow. I cannot seem
to get a comprehensive answer as to why if this extra payment is
sent in the beginning of the year it cannot be applied to any increases
in taxes for that year.
Of course, I returned this excess from the escrow
check to the lender and requested them to deposit it back into escrow.
I don't understand why if there is excess in the escrow account
it isn't used for any tax increases. I want to keep my monthly payments
consistent throughout the life of this loan; I just don't know how
to do this. A friend told me to put any extra payments toward the
principal (which I understand but this won't keep my monthly payment
Putting the extra payments toward principal isn't the answer.
You're anticipating tax increases and trying to reserve
for them in your escrow account. Using the money to prepay the mortgage
will reduce your interest expense over time, but you'll still have
to come up with the cash to meet any shortfalls in the escrow account.
The problem is that the mortgage servicing industry
is very heavily regulated concerning excess reserves in escrow accounts
because of past abuses where they required homeowners to over reserve
for taxes and insurance. Excess reserves protect the lender by keeping
enough money on hand to pay the taxes or the homeowners insurance
My solution is that you put the money aside
in an account that you control. If your employer can structure it
this way you could even use a payroll deduction to fund a savings
account. You'll have the money on hand to meet anticipated increases
in your mortgage payments but you won't have to deal with the regulations
concerning refunds of escrow overpayments.
-- Posted: Jan. 14, 2002