Can You Lower Your Escrow Payment?

An escrow account is a financial arrangement where a neutral third party holds funds on behalf of two parties involved in a transaction. In the context of a mortgage, it is a portion of your monthly mortgage payment managed by your lender to cover specific property-related expenses.

Components of Your Escrow Payment

Your monthly mortgage payment includes an escrow payment. This covers property taxes and homeowner’s insurance. These funds are collected by your mortgage servicer and held in a separate account until they are due.

Property taxes are levied by local governments based on your home’s assessed value and fund public services. Your lender collects a portion monthly and disburses the full amount when due, instead of you paying these large, often semi-annual or annual, tax bills directly. Homeowner’s insurance premiums are similarly handled. Your lender collects a twelfth of the annual premium each month and pays your insurance provider on your behalf, ensuring continuous coverage. This system simplifies budgeting for homeowners and protects the lender’s investment by ensuring these expenses are paid.

Reasons for Escrow Payment Adjustments

Escrow payments can change over time due to factors impacting the underlying costs they cover. Changes in property taxes are a common reason for adjustment. Local governments may reassess property values, or tax rates can be adjusted, directly influencing the amount due annually. When these tax amounts increase, your lender will collect more through your escrow payment to cover the higher future bills.

Homeowner’s insurance premiums can fluctuate. Policy renewals, changes in coverage, or your claims history can lead to higher or lower insurance costs. If your insurance premium rises, your monthly escrow contribution will likely increase to accommodate this change. Your escrow account undergoes an annual analysis to ensure sufficient funds are collected. If an unexpected increase in taxes or insurance during the past year results in a shortage, your future monthly payments will increase to cover that deficit and build a sufficient cushion. Conversely, if an overpayment occurred, creating a surplus, you might receive a refund or see a reduction in your future monthly payment.

Steps to Reduce Your Escrow Payment

Homeowners can take several steps to reduce their escrow payments. One area to explore is your property tax assessment. Obtain your property tax assessment from your local tax authority and review the valuation. If you believe the assessed value is inaccurate or disproportionate to comparable properties, you may have grounds to appeal it. The appeal process typically involves submitting documentation to support your claim, such as recent appraisals or sales data for similar homes in your area, and may include an informal review or a formal hearing.

Investigate property tax exemptions available in your jurisdiction. Common exemptions include homestead exemptions, which reduce the taxable value of your primary residence, and those for seniors, veterans, or individuals with disabilities. Eligibility criteria and application procedures vary, so contacting your local assessor’s office or tax authority is advisable to determine if you qualify and how to apply. Securing an exemption can directly lower your annual property tax bill, which in turn reduces the amount your lender collects for escrow.

Shopping for homeowner’s insurance is another strategy. Insurance premiums can vary considerably between providers for similar coverage. Obtain quotes from multiple insurance companies regularly to compare rates. When comparing policies, consider adjusting your deductible; opting for a higher deductible can often lead to a lower premium, though it means you would pay more out-of-pocket in the event of a claim. Reviewing your coverage limits to ensure they align with your current needs, without being excessive, can also help optimize your premium.

If your annual escrow analysis reveals a surplus, you are typically entitled to a refund. This refund corrects the overcollection and can lead to a lower future monthly escrow payment, as your lender adjusts the collection amount to prevent another surplus. The Real Estate Settlement Procedures Act (RESPA) generally limits the cushion lenders can hold in your escrow account to no more than two months’ worth of payments, so significant surpluses should be returned.

If the annual analysis indicates an escrow shortage, your monthly payment will increase to cover the deficit over the next 12 months. To prevent this increase, you can make a lump-sum payment to cover the shortage. Paying the shortage upfront avoids spreading it out across your monthly payments, preventing a significant jump in your overall mortgage payment for the upcoming year. This proactive step can offer immediate relief from a potential payment increase.

Monitoring Your Escrow Account

Vigilance is important for managing your escrow account. Lenders are typically required to conduct an annual escrow analysis. This analysis reviews the previous year’s actual expenses for taxes and insurance against the funds collected and projects the necessary amount for the upcoming year. Upon receiving your annual escrow analysis statement, review it carefully to ensure the accuracy of all tax and insurance payments made on your behalf and to identify any reported surpluses or shortages.

If you have questions about the analysis or believe there is an error, promptly communicate with your mortgage servicer. They can provide clarification on the calculations and explain any adjustments to your monthly payment. Maintain thorough records of all property tax bills, homeowner’s insurance policies, and correspondence related to your escrow account. This documentation allows you to verify the information presented in your annual statements and supports any inquiries or disputes you may have with your lender.