Can Escrow Go Up? Why Your Payment Increases
Learn why your mortgage escrow payment may increase. Understand the underlying causes of changes and how to effectively manage them.
A mortgage payment increase can be unsettling for homeowners. A common factor behind such changes is the escrow account, a fund managed by your mortgage lender to cover certain property-related expenses. Homeowners often wonder about the stability of their monthly payments, particularly how the escrow portion might fluctuate.
Understanding Escrow Basics
An escrow account serves as a dedicated fund maintained by your mortgage lender to handle specific home-related costs. This account typically collects money from a portion of your monthly mortgage payment to pay for recurring expenses such as property taxes and homeowner’s insurance premiums. The system helps ensure these payments are made on time, protecting your financial standing and the lender’s investment in the property. It simplifies financial management by consolidating these larger, often infrequent, bills into smaller, predictable monthly contributions.
Common Reasons for Escrow Increases
Several factors can increase the escrow portion of a mortgage payment. One frequent cause is an increase in local property taxes. Property tax assessments or rates can rise due to general market value increases, recent home sales influencing property values, or local government budget needs. Home improvements can also trigger a reassessment, leading to a higher property value and a greater tax bill.
Another common reason for an escrow payment increase is a rise in homeowner’s insurance premiums. Insurance costs can escalate due to various factors, including inflation, higher construction material and labor costs, and an increase in claims from severe weather events or natural disasters in the area. General market trends, a homeowner’s claims history, or even the age and condition of the home can also influence premium adjustments. Since many policies renew annually, these premium changes directly impact the amount needed in escrow.
An escrow account shortage is another factor that can cause an increase. A shortage occurs if the funds collected were insufficient to cover the actual property taxes and insurance premiums paid out by the lender over the past year. Lenders typically spread the repayment of this shortage over the next 12 monthly escrow payments, increasing the total amount due each month. An escrow deficiency, a more severe shortage with a negative balance, also necessitates an increased payment to cover the shortfall and re-establish a cushion.
The Escrow Analysis Process
Mortgage servicers conduct an annual escrow analysis to review and adjust the account, ensuring sufficient funds are available for upcoming property tax and insurance payments. During this process, the lender compares the actual expenses paid from the escrow account in the preceding 12 months with the projected costs for the next year. This review helps determine if there is a surplus (excess funds) or a shortage or deficiency (insufficient funds).
If the analysis identifies a shortage or deficiency, the lender will adjust the monthly escrow payment for the upcoming year. This adjustment aims to cover the anticipated costs and recoup any existing shortfall, often by spreading the repayment over 12 months. Conversely, if a surplus is found (e.g., exceeding $50), the lender may issue a refund or apply the excess funds to future payments. Homeowners typically receive an annual escrow statement detailing this analysis, outlining the account’s activity and any changes to their monthly payment.
Managing Escrow Changes
When an escrow payment increases, reviewing the annual escrow analysis statement sent by your lender is an important first step. This statement provides a detailed breakdown of the property tax amounts, insurance premiums, and the calculation of any shortage or surplus. Carefully examining this document for accuracy can help you understand the specific reasons behind the change.
If any part of the statement is unclear or appears incorrect, contacting your mortgage servicer for clarification is advisable. They can provide a more detailed explanation of the figures and calculations involved. If the increase stems from a significant rise in property taxes, you may have the option to appeal your property’s assessed value with the local tax assessor’s office. This is a localized process with specific deadlines and requirements for presenting evidence to support your case.
Homeowners are not obligated to retain their current homeowner’s insurance provider. Shopping for more competitive rates from other insurers can reduce your insurance premium, lowering the insurance portion of your escrow payment. When switching insurers, it is important to ensure that the new policy details are promptly provided to your mortgage lender to avoid any disruption in payments or an escrow shortage.