What is Escrow Reconciliation?
On the surface real estate purchases look easy – you choose a house, get a mortgage, and enjoy your home while paying off that mortgage. Unfortunately, there’s a lot going on behind the scenes of mortgages and what seems rigid might be more flexible than you think, even in fixed mortgages.
Let’s imagine you’ve signed a 30-year fixed mortgage on your home and have had no issues for a couple years. You chose the fixed mortgage to lock in your rates and it’s paying off. One day, you receive your statement in the mail only to find out your rate went up. How does that happen in a fixed mortgage?
Fixed means fixed interest rates, but it doesn’t mean fixed cost. It all has to do with mortgage changes and escrow reconciliation. To help avoid surprises down the road, let’s review why your mortgage can change, what it means to you, and how to make sure your protected with escrow reconciliation.
Explaining Escrow Reconciliation
To better explain escrow reconciliation, also known as escrow account reconciliation or simply reconciliation, you need to understand why it happens. Escrow reconciliation hinders primarily on changes in mortgages due to property taxes or homeowners’ insurance. If your mortgage goes up, it’s normally for these two reasons.
Property Taxes – Your annual property tax costs are nestled into your mortgage. Every month you pay 1/12 of any property taxes and levies that your local jurisdiction requires. If your property is reassessed, changes jurisdictions, or new taxes are levied, there will be changes in the amount on your mortgage.
Homeowners Insurance – While you can lock in a great rate for a few months, chances are your homeowners’ insurance premiums will go up over time. Like property taxes, homeowners’ insurance premiums are normally a part of your monthly bill. If your insurance company increases premiums, your mortgage can go up.
What Does That Mean for Escrow Reconciliation?
Your mortgage company takes a portion of your payments to pay these monthly bills. Your mortgage loan company will keep an accurate count on what you’ve paid to them, what they’ve been charged, and how much they’ve paid out.
Once a year, normally in the first half, your mortgage company will dip into their books to reconcile how much they’ve paid out vs. what you have paid them. Any money leftover is paid back to the homeowner in the form of an escrow reconciliation payment.
The mortgage company will then use the data from previous and current years to adjust what they charge you and what they pay out. The next year they do it all again. You’re likely to receive many reconciliation checks over the life of your mortgage.
Why Escrow Reconciliation Happens
Escrow reconciliation happens due to changes in charges on your mortgage, but it also happens based on how mortgages work. Let’s imagine your property taxes go up by $48 a year. You’d expect your mortgage to reflect that with a monthly $4 increase, after all $48/12 =$4 but when you get your first statement there is an extra $8.
This is because mortgage companies normally bill the first and next years payments in one statement. Once those payments are adjusted the next year, you’ll receive the difference during escrow reconciliation.
Two vs Three Way Reconciliation
Escrow account reconciliation protects you from not being charged too much. Ideally, any mortgage company you choose for your loan will use three-way reconciliation to make sure all payments are accurate and accounted for.
Two-way reconciliation is like balancing your check book. You check your bank balance vs. your own register and reconcile any differences. If you and the bank show the same amount, you’re balanced.
Three-way reconciliation adds an additional layer of protection for both you and the mortgage company and is most often used for mortgages owned by trusts. In three-way reconciliation your loan company makes sure the bank balance, book balance, and the client’s trust ledger balance all agree. Any missing or owed items are reconciled for the mortgage borrower or trust.
Using a Professional for Other Questions
Escrow account reconciliation isn’t the easiest process to understand and you’ll likely have more questions even after the information above. If you want to know more about escrow reconciliation or how your mortgage company handles your account, give them a call directly.
Any reputable loan officer will be able to discuss how they handle account reconciliation and provide you with information on your escrow account based on your unique loan.
Escrow reconciliation is a way for your mortgage company to account for payments and any changes over the course of your mortgage to make sure you’re not overcharged. Always choose a loan company with three-way reconciliation and if you have questions about your mortgage, call your loan company today.