The Reasons Why Your Escrow Payment Goes Up

An escrow account is a dedicated third-party account managed by your mortgage servicer. Its primary purpose is to hold funds for property-related expenses, ensuring these significant costs are paid on time. This system simplifies financial management for homeowners by bundling these recurring expenses into their regular monthly mortgage payment.

Components of Your Escrow Payment

The funds held within an escrow account are allocated to cover two main property-related expenses: property taxes and homeowner’s insurance premiums. By collecting these funds monthly, the servicer ensures that large, infrequent bills are paid promptly, preventing potential liens or lapses in coverage.

Increases in Property Taxes

A rise in property taxes is a common reason for an increase in your escrow payment. Local tax authorities regularly reassess property values, and if your home’s assessed value increases due to market appreciation or property improvements, your tax liability will go up. Additionally, local governing bodies may adjust the tax rate, also known as the millage rate, to fund public services. Even without a reassessment, a higher tax rate translates to a larger tax bill.

New local levies or special assessments can also contribute to higher property taxes. These assessments often finance specific community projects, such as improvements to roads, water systems, or local schools. When such initiatives are approved, the cost is distributed among property owners in the affected area, increasing their annual tax obligation and reflecting in your monthly escrow contribution.

Increases in Homeowner’s Insurance

Homeowner’s insurance premiums can also increase, directly impacting your escrow payment. General market trends, such as inflation and the rising cost of building materials and labor, contribute to higher repair and rebuilding expenses for insurers. This leads to an increase in the cost of coverage. Furthermore, a rise in natural disaster claims within a specific geographic area can cause insurers to adjust their risk assessments and premium rates for policyholders in that region.

Your personal claims history can influence your premium, as filing multiple claims may signal a higher risk to the insurer. Adjustments to your policy’s coverage limits or deductibles, made by you or due to insurer requirements, can alter the premium amount. The age and overall condition of your home, including its roofing, plumbing, or electrical systems, might also factor into premium calculations, with older homes facing higher rates.

Addressing an Escrow Shortage

An escrow shortage occurs when the amount collected in your escrow account over the past year was not enough to cover the actual property tax and insurance expenses paid on your behalf. This situation arises if tax rates or insurance premiums increased mid-year, or if initial projections for these costs were underestimated.

To recover this shortage, the servicer adjusts your monthly escrow payment. The increased payment will cover projected expenses for the upcoming year and include an amount to spread the recovery of the past shortage over a period, often 12 months. You may also have the option to pay the shortage in a lump sum.

The Escrow Analysis Process

Mortgage servicers conduct an annual escrow analysis to reconcile the actual expenses paid from your account with the total amounts collected over the preceding year. The outcome of this review determines if your current monthly escrow payment needs to be adjusted.

Following the analysis, if there is a surplus in your account, meaning more funds were collected than needed, the excess amount is refunded to you, provided it exceeds a certain threshold, often $50. Conversely, if a shortage is identified, your monthly payment will increase to cover the deficit. Homeowners receive an annual escrow statement detailing the prior year’s activity and outlining the new projected monthly payment.