What Does It Mean When Your Escrow Payment Goes Up?

A mortgage escrow account serves as a holding place for funds collected by a mortgage servicer to cover specific property-related expenses. This account ensures that critical obligations tied to homeownership, beyond the loan principal and interest, are paid on time. Its primary purpose is to manage and disburse funds for recurring costs essential for maintaining the property and the loan agreement.

What Your Mortgage Escrow Account Covers

A mortgage escrow account manages payments for property taxes, assessed by local government entities based on the value of the home and land. These taxes are a mandatory annual obligation for property owners and fund public services such as schools, infrastructure, and emergency services. Mortgage servicers collect a portion of these anticipated tax payments with each monthly mortgage payment, holding them in the escrow account until the tax due date.

Homeowner’s insurance premiums also constitute a major component of an escrow account. This insurance protects the property against damage from events like fire, storms, or theft, and is required by lenders to safeguard their investment. The servicer collects monthly contributions to the escrow account, then pays the annual or semi-annual insurance premium directly to the insurer when it becomes due.

Private mortgage insurance (PMI) can also be included in the escrow account, particularly for homeowners who made a down payment of less than 20% of the home’s purchase price. PMI protects the lender in case the homeowner defaults on the loan. Other specific charges, such as flood insurance premiums in designated flood zones, can also be part of the escrow arrangement. These components are distinct from the mortgage loan’s principal and interest, though often bundled into one monthly payment.

Key Drivers of Escrow Increases

One reason for an increase in escrow payments is a rise in local property tax assessments. Local taxing authorities periodically reassess property values. If the assessed value of a home increases, the corresponding property tax bill will increase. This requires more funds in the escrow account to cover the higher annual tax obligation, so the servicer adjusts the monthly escrow contribution.

Another factor leading to higher escrow payments is an increase in homeowner’s insurance premiums. Insurance companies may raise rates due to various reasons, including a general rise in the cost of repairs and materials, an increase in claims in a specific geographic area, or changes in the homeowner’s coverage. If the annual premium for the homeowner’s insurance policy increases, the mortgage servicer must collect more money monthly to ensure sufficient funds are available when the premium is due.

An escrow shortage or deficit from a previous period also causes an increase in monthly payments. A shortage occurs when the servicer paid out more for taxes and insurance from the escrow account than was collected from the homeowner over the past year. This means the account had insufficient funds, and the servicer must recover the deficit while also collecting enough for future anticipated expenses. The shortage amount is spread out and added to the monthly escrow payment over the next 12 months.

New escrow requirements can lead to an upward adjustment in payments. For instance, if private mortgage insurance (PMI) was not initially part of the loan but becomes a requirement due to a refinancing or a change in loan terms, the additional monthly premium will be added to the escrow obligation. Similarly, if a property is reclassified into a flood zone, requiring new flood insurance, that premium will also be incorporated into the escrow payment. Each of these drivers impacts the total amount needed in the escrow account, requiring an adjustment to the homeowner’s monthly contribution.

The Annual Escrow Analysis

Mortgage servicers conduct an annual escrow analysis to review the activity of the escrow account once every 12 months. This process involves comparing the actual disbursements made from the account for property taxes and insurance premiums over the past year against the funds that were collected from the homeowner. The analysis identifies whether there was a surplus or a shortage in the account balance.

A surplus indicates that more money was collected than was needed to cover the expenses, while a shortage means that the account paid out more than it received. Based on this historical review and projections for the upcoming year’s expenses, the servicer calculates the new required monthly escrow payment. This calculation ensures there will be enough funds to cover the anticipated property tax and insurance bills, plus maintain a minimum reserve balance, which is often equivalent to two months of escrow payments.

If a shortage is identified, the servicer adds that amount to the projected future expenses and spreads the total over the next 12 monthly payments, causing an increase. Conversely, a surplus results in a refund to the homeowner. The annual analysis is a regulatory requirement designed to keep the escrow account balanced and prevent large, unexpected payment fluctuations for the homeowner, although increases can still occur due to rising underlying costs.

Understanding Your Escrow Statement

After the annual escrow analysis is completed, homeowners receive an escrow statement from their mortgage servicer. This document provides a detailed breakdown of the escrow account’s activity over the past year and projections for the upcoming 12 months. The statement itemizes the actual amounts paid out for property taxes and insurance premiums during the review period.

The statement also outlines the projected expenses for the next year, showing the estimated property tax bill and insurance premiums. It indicates the current balance of the escrow account, any identified shortage or surplus from the previous year, and the new monthly escrow payment calculation. By examining this statement, homeowners can pinpoint the specific reasons for any increase in their payment, such as higher property tax assessments or increased insurance premiums. Understanding each line item on the statement allows homeowners to verify the calculations and identify whether the change is an increase in underlying costs or a previous account shortage.