Why Does My Escrow Payment Keep Going Up?
If you’ve got a fixed-rate mortgage, you might expect your monthly payment to stay the same year after year. But from time to time, you may have noticed a surprise increase in the amount you have to pay — to your escrow account.
Nobody ever wants a bill to increase, and if there is no room in your budget for the unexpected, you may have trouble covering this monthly expense. If your escrow payment is slowly climbing, it’s finally time to get down to the bottom of things. In this article, we’ll help you figure out why your escrow payment keeps going up.
What is an escrow account?
In most cases, a portion of a homeowner’s mortgage payment every month is deposited into an account designated for mortgage-related expenses like property taxes and insurance. This account is called an escrow account. Escrow accounts are traditionally established at the time a person takes out their mortgage loan.
In some cases, homeowners are not required to have an escrow account. But much of the time, lenders insist on them to ensure that these required payments get made. Should you not have an escrow account, you are still expected to cover the cost of homeowners insurance and property tax payments.
What costs are put into your mortgage escrow account?
Once your lender establishes an escrow account for you, they will determine the annual cost of your homeowners insurance and property taxes and calculate a monthly amount that will satisfy those annual costs plus any required reserves.
Your servicer will also have 45 days to provide you with a statement that clearly outlines the total cost of the expenses that are paid using the funds in your escrow account in addition to when these payments are due.
Homeowners may fear that these additional expenses can hurt them financially if they are too high, but there are limits to how much a lender can require a homeowner to pay into their escrow. Guidelines established by the Real Estate Settlement Procedures Act state that lenders cannot require a cushion of more than two months worth of payments. After the payments are made into the account for the full year, the surplus, or any funds in excess of $50, must be refunded to the borrower.
3 reasons your escrow payment might be going up
Your lender will recalculate your escrow payment every year, and it is possible that your escrow payment will change. Common reasons your escrow payment might be going up include:
- An increase in homeowners insurance premium
- An increase in property taxes in your area
- Your servicer miscalculated fees
Any changes made to your monthly payment will be explained to you in the yearly escrow analysis, which is provided by your mortgage servicer.
What is an escrow shortage?
Your escrow analysis will reflect changes made to your monthly payments, but you can also find information regarding an escrow shortage. An escrow shortage is when the money in your account is less than what is needed to cover the cost of your mortgage-related expenses for the year.
What to do if your escrow account is short
Addressing an escrow shortage is simple. When your escrow account is short, you will be given notice indicating that an increase in property taxes or insurance is the cause. As a homeowner, even if the shortage isn’t your fault, you are still responsible for the payment.
Depending on the lender, your options for covering the cost of this shortage include:
- Paying the full amount of the shortage
- Starting to make a higher monthly payment to cover the shortfall
Failure to pay your property taxes can result in a lien on your home, foreclosure, fines and penalties. In addition, when homeowners insurance is not paid, you are at risk of being liable for damage to your home. Ultimately, if a borrower who does not have an escrow account does not make payments, lenders can open an account and charge them for the unpaid balance or add the unpaid balance to the total loan amount.
If the increase of the escrow payment is not manageable, one solution is to lower your mortgage payments to allow room in your budget for the additional money that will be needed for escrow. This can be done by refinancing or extending your repayment term. With a lower interest rate or more time to pay back your loan, you’ll generally have smaller payments every month.
The bottom line
Your mortgage payment and interest may not change, but your escrow payment can vary from year to year. Although an escrow increase may seem like an inconvenience, escrow accounts have saved many homeowners from financial troubles. They help you manage the various mortgage-related expenses you are obligated to pay, budget accordingly and prevent you from falling behind on payments.