If I Pay My Escrow Shortage Will My Payment Go Down?

When securing a mortgage, many homeowners encounter an escrow account as a standard part of their loan arrangement. This account, managed by your lender, covers property expenses like taxes and homeowner’s insurance, integrating them into your monthly mortgage payment. However, situations can arise where this account experiences a deficit, known as an escrow shortage, which can directly influence your overall monthly payment.

Understanding Escrow Accounts and Shortages

A mortgage escrow account is established by your lender to hold funds for property-related expenses. Each month, a portion of your total mortgage payment is deposited into this account. The primary purpose is to ensure that significant recurring costs, such as property taxes and homeowner’s insurance premiums, are paid on time. Some escrow accounts may also cover flood insurance or private mortgage insurance (PMI), depending on the loan terms.

When these bills become due, your lender pays them directly from the escrow account. An escrow shortage occurs when the actual cost of these property expenses exceeds the amount collected in your account.

Common Reasons for Escrow Shortages

Escrow shortages frequently arise due to increases in the cost of expenses paid through the account. A common reason is an increase in property taxes. Local governments may raise tax rates or reassess property values, leading to higher annual tax bills than initially projected. This reassessment can happen periodically or when property values in the area generally increase.

Another significant contributor is an increase in homeowner’s insurance premiums. Factors like a rise in claims, increased material and labor costs, or more frequent severe weather can drive up insurance expenses. Unexpected policy changes or initial underestimation by the lender can also contribute.

How Escrow Payments are Determined

Mortgage servicers conduct an annual escrow analysis to project future expenses. This analysis compares the funds collected over the past year with the actual amounts paid out for taxes and insurance. It also estimates the anticipated costs for these items for the upcoming 12 months.

Based on this annual review, the total projected annual expenses are divided by 12 to determine your new monthly escrow contribution. If the analysis reveals an escrow shortage, that deficit is typically spread out and added to your new monthly escrow payment over the next 12 months. For example, if your projected annual expenses are $4,800 ($400 per month) and you have a $600 shortage, your new monthly escrow payment would be $400 plus $50 (the $600 shortage divided by 12 months), totaling $450. This increased monthly escrow portion then raises your overall mortgage payment.

Addressing an Escrow Shortage

Homeowners generally have two primary options for resolution when notified of an escrow shortage. One option is to pay the entire shortage in a single lump sum. If you choose this approach, the deficit is immediately covered, preventing that specific shortage amount from being incorporated into your future monthly payments. Therefore, paying the shortage in full can result in a lower overall monthly mortgage payment than if the shortage were spread out.

Alternatively, if you do not pay the shortage in a lump sum, your lender will typically divide the shortage amount by 12 and add that increment to your regular monthly escrow payment for the next year. This increases your total monthly mortgage payment until the shortage is repaid. It is important to remember that even if you pay a shortage in a lump sum, your base escrow payment for the upcoming year might still be higher than the previous year. This is because the underlying property taxes or insurance premiums themselves may have increased, which is a separate adjustment from the shortage repayment. Always review your annual escrow analysis statement carefully to understand the detailed breakdown of your new payment and the factors contributing to changes.