Annual Costs

• You pay your homeowner's insurance at least once per year and your lender bases its estimate of this expense on the premium you paid during the last year. However, your insurance costs may decrease over time because some firm's offer discounts to long-term customers who have never submitted claims. You can also sometimes get a discount if you buy your automobile or life insurance from your homeowner's insurance provider.
  
  Your property tax may decrease if your home's value falls. You may also see a decrease in your tax assessment if the local authorities decide to reduce the tax rate. Therefore, you may end up with a surplus in your escrow account due to reductions in your taxes and insurance.
  
  

Mortgage Insurance

• If you have a first mortgage on which the loan amount exceeds 80 percent of the property value, then your lender may require you to buy private mortgage insurance as this insurance protects your lender if you default on the loan. Mortgage insurance premiums are added to your escrow. However, your lender must automatically cancel your PMI once you have paid down your principal with the result that your loan amounts to less than 78 percent of your property value. At this point, you will begin to accrue an overage because your total monthly payment remains the same even though you are no longer paying for PMI.
  
  

Cushion

• Property prices do not always rise and if you default on your debt, the sale of your property might not raise enough cash to cover your outstanding mortgage balance as well as the insurance and taxes. To prevent lenders from taking a loss on such situations, federal law allows your lender to keep a cushion in your escrow account that amounts to up to one-sixth of the projected annual cost of your taxes and insurance. This overage also means that lenders are less likely to end up with a shortfall if your tax or insurance costs rise.
  
  

Refunds

• Under federal law, your lender has to balance your escrow account once a year. At this time, you lender recalculates your monthly mortgage payment by reevaluating your projected escrow expenses. If necessary, your lender can increase your payment but your lender can also decrease your payment if your escrow costs have fallen. Having balanced your account, your lender must send you a refund check if any overage exists in the account. The account balancing date normally occurs on the anniversary of the day you took out the loan.