Escrow account question

[Luigi]

Hi, there, everyone.  I've got a question regarding escrow accounts (or at least mine).  I'm aware of what they do, you pay extra every month to save for taxes, insurance and mortgage insurance, if you have it.  I have a question, though, about the amount of money that goes into it.

I received a statement a week ago telling me that my escrow payment was going to go down $55 a month starting in August.  I was reading further into the whole thing, and apparently there will be a shortage of some money at one point during the next year, they predicted, so it will go down $55 only, not $70.  While that all makes sense, what didn't was the fact that they estimated that my lowest monthly balance before the correction was still like $200.  In other words, the way it looked to me, the escrow account, at its lowest was roughly $200, but that's not good enough, and it needs to be 350 or so. 

My questions are first, why is $200 extra not enough, and also what happens to this extra money each month after my mortgage is paid off?  Do I get reimbursed the excess, or does the bank keep it?  Also, since I am forced to keep more in the account than I need to cover the bills, next time I take out a mortgage (if that happens), would you guys recommend avoiding a PITI loan, since I'm sure I could find a better use for the excess money than it sitting, not doing anything?

[ncornilsen]

They have a legally allowed minimum balance that they can enforce through escrow increases... so if they project your balance will dip below it at any point in the year, they can adjust the payment to keep it above that amount. they hold an extra $650 for me, which really sucks to know that many of  my employees are being held hostage and not doing anything for me.

[fiveoclockshadow]

You get any remaining balance left in the escrow account when the mortgage ends (refinance, sale, paying off mortgage).

The whole point to escrow is so lender has some confidence the property will remain insured and the title clear of tax liens. Insurance rates and tax appraisals change so they keep extra in the escrow account to handle those cases. Annually they adjust as necessary. If the adjustment is large and in your favor you may also get a reimbursement check (not unusual after the first year of the mortgage as often estimates at closing were off and conservative). 

[willn]

In most states and most mortgage contracts you aren't required to pay into escrow. You can choose to pay those items yourself.  If I recall, it usually isn't an obligation if you have 20% equity in the secured property.

[Luigi]

In most states and most mortgage contracts you aren't required to pay into escrow. You can choose to pay those items yourself.  If I recall, it usually isn't an obligation if you have 20% equity in the secured property.

I don't know if they would have required I have an escrow account, I went in with the intention of getting one, so I could just let the bank send out payments for my tax and insurance bills, so I didn't have to bother with it.  But knowing what I know now, I don't like the idea of having any employees tied up not doing anything in a place that I cannot make them go to work.  In other words, I don't like that they make me overpay to cover things, next time, I'm going to just get a principal/interest mortgage, and pay the other two myself.  This way, I can control what my employees do, and the bank doesn't hold them hostage.

edit to add: Thank you guys for the info.  I'm glad I'm not the only one who's run into this.