Does Escrow Change Every Year and Why It Happens
Understand why your mortgage escrow payment changes annually, driven by taxes and insurance, and how to effectively manage these adjustments.
An escrow account, in the context of a mortgage, serves as a dedicated holding place for funds collected by your mortgage servicer to cover property-related expenses. These include property taxes and homeowner’s insurance premiums. By collecting a portion of these costs with your monthly mortgage payment, the servicer ensures these significant bills are paid on time, alleviating the homeowner’s administrative burden. Escrow payments often change on an annual basis. This article explores the reasons for these fluctuations and their impact on your monthly mortgage payment.
Factors Leading to Escrow Changes
The primary components driving changes in your escrow payment are property taxes and homeowner’s insurance premiums. Local government entities assess property taxes, and these assessments can fluctuate significantly from year to year. Factors such as changes in property values, adjustments to the local millage rate, or the introduction of new public levies for community improvements can all change your annual tax obligation. For instance, a rise in a home’s market value due to local development or general appreciation often translates into higher property taxes.
Homeowner’s insurance premiums also contribute to escrow account variability. These costs can rise due to inflationary pressures, increased claims within a specific geographic area, or heightened risks associated with natural disasters. Changes to your coverage, such as increasing dwelling coverage, will also directly impact the premium.
The Annual Escrow Analysis
Mortgage servicers conduct an annual escrow analysis to ensure sufficient funds are collected to cover anticipated property taxes and insurance premiums for the upcoming year. Servicers must review the account at least once a year. The purpose is to compare the previous year’s actual expenses with the funds collected and project the necessary amount for the next 12 months.
During this analysis, the servicer identifies whether an escrow shortage or surplus exists. An escrow shortage occurs when the amount collected in the past year was insufficient to cover the actual costs of taxes and insurance. If a shortage is identified, the homeowner has options: either pay the deficit as a lump sum or have the amount spread out and added to their monthly mortgage payment over the next 12 months. Conversely, an escrow surplus indicates that more money was collected than necessary. If the surplus exceeds a certain threshold, often around $50, the servicer is required to refund the excess to the homeowner.
Following the analysis, the servicer sends an annual escrow statement to the homeowner. This statement details the findings of the analysis, including the activity from the past 12 months and projections for the next 12 months. It also outlines the new monthly payment amount and the effective date of the change, along with explanations for any adjustments.
Understanding and Managing Escrow Adjustments
Upon receiving the annual escrow statement, homeowners should review it for accuracy. Cross-reference the listed property tax and insurance amounts with personal records or recent bills from the tax authority and insurance provider. Verifying these figures ensures that the servicer’s projections align with actual or anticipated costs.
If any discrepancies or errors are identified on the statement, contacting the mortgage servicer promptly is important. Homeowners can inquire about specific line items or challenge figures that appear incorrect, providing supporting documentation if necessary. This proactive approach helps resolve potential issues before they impact future payments.
For homeowners facing an escrow shortage, understanding the repayment options is important. Most servicers allow the homeowner to pay the shortage in a single lump sum, preventing an increase in the monthly mortgage payment. Alternatively, the shortage can be amortized over the next 12 months, resulting in a temporary increase in the monthly payment. Homeowners should monitor their property tax assessments and insurance policies throughout the year, as these costs are the primary drivers of escrow adjustments. Staying informed about changes can help anticipate and budget for future escrow payment modifications.