Why Did My Escrow Payment Go Up?
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If you recently received a mortgage statement that’s higher than usual, you might wonder, “Why did my monthly escrow payment go up?” Typically, this happens when there’s an increase in your homeowners insurance, property taxes or both.
Sometimes, lenders miscalculate the amount of taxes and insurance to collect in your estimated escrow account, leaving you with an escrow shortage.
What is an escrow account?
An escrow account, also called an impound account, is money set aside by your lender to pay ongoing homeownership-related expenses, such as homeowners insurance and property taxes. The lender collects enough cash to establish the account at your closing, besides adding a portion to your monthly payment to pay your property tax bill and homeowners insurance premium each year.
Not all mortgage lenders require an escrow account, but if you don’t have one, you’re responsible for paying these costs on your own. If you get behind on your property taxes, you could end up with a tax lien — and you might even face foreclosure.
3 reasons your monthly escrow payment might go up
Each year, your mortgage servicer must provide you with an escrow analysis that shows money spent in the past 12 months, and what’s due in the year ahead.
If your monthly escrow payment is spiking, it’s probably because of one, or a combination, of the following reasons:
Your homeowners insurance premium went up. Insurance carriers may bump up your home insurance cost because of filed claims, increases in construction costs in your area, your credit score or inflation. If you add additional coverage or lower your deductible, you might also see a rise in your premium.
Your property taxes increased. Property taxes usually ride on the coattails of property values. In other words, if your home is worth more, your tax bill will go up, too.
Your servicer made a mistake. Sloppy bookkeeping or clerical errors may result in a bigger escrow payment. However, you have the right to question any issues you find, and the Consumer Financial Protection Bureau (CFPB) requires lenders to resolve the problem within 30 days of your request.
What is an escrow shortage?
An escrow shortage is when your servicer doesn’t have enough funds in your escrow account to pay future property taxes or homeowners insurance premiums. Your mortgage servicer must notify you at least 30 days before any changes take effect and give you payment options to make up the escrow shortage amount.
You have three options to make up an escrow shortage. You can:
1. Pay the entire balance. You’ll typically receive a shortage coupon with the dollar amount pre-printed on it so you can pay the total amount in one lump sum.
2. Spread the payment out. Some mortgage servicers give you payment options to spread the deficient balance out over a 12-month period.
3. Refinance your loan. If current mortgage rates and closing costs are low enough, it may make sense to refinance your loan. You may offset the monthly escrow payment with a lower PITI payment, and can finance escrow costs if the breakeven (the length of time it takes you to recoup closing costs) makes sense.
What to look for on your annual escrow analysis
Federal law requires mortgage servicers to provide you with an annual written breakdown that has a detailed accounting of how your escrow account money is managed. It also reflects the schedule for escrow disbursements in the coming year.
Most escrow analysis statements list:
- A side-by-side comparison of your current and new escrow payment.
- The date the new monthly escrow payment will take effect.
- A lump-sum payment option for the entire escrow shortage balance.
- A monthly payment option to spread the shortage payments out over 12 months.
- A schedule that itemizes the amount of each expense, as well as due dates.
How to lower your monthly escrow payment
There are two ways you can lower your monthly escrow payment — if you don’t mind a little extra legwork.
Shop for a new homeowners insurance company. Use an online home insurance comparison site to get your best home insurance deal. Even though you might have to pay the new premium upfront, you’ll get a refund of any unused balance on your old homeowners policy.
Appeal your property tax bill. Contact your local property assessor’s office to find out its process for disputing a property tax bill if you think the increase is excessive. You may be successful in getting the assessor to lower the amount due, which, in turn, may lower your monthly escrow payment.