Why Did My Escrow Payment Go Up? Common Causes

It can be surprising for homeowners to discover their monthly mortgage payment has increased, especially when the principal and interest portion remains fixed. This common occurrence often stems from adjustments to the escrow account, a component designed to manage certain property-related expenses. Understanding the reasons behind these changes helps homeowners anticipate and manage their housing costs more effectively.

Understanding Your Escrow Account

An escrow account operates as a dedicated savings account managed by your mortgage lender. Its primary purpose is to collect and disburse funds for specific property-related expenses on your behalf. Each month, a portion of your total mortgage payment is deposited into this account.

The funds held in escrow are typically used to cover annual property taxes and homeowners insurance premiums. For some borrowers, particularly those who made a down payment of less than 20% of the home’s purchase price, private mortgage insurance (PMI) premiums may also be included. The lender estimates these yearly costs, divides them by twelve, and adds that monthly amount to your regular mortgage payment.

Key Factors Driving Escrow Increases

Several common factors can lead to an increase in your monthly escrow payment. These changes are typically outside of your lender’s control, reflecting fluctuations in the underlying costs associated with homeownership.

One frequent cause is an increase in property taxes. Local taxing authorities periodically reassess property values, and if your home’s assessed value rises, your property taxes will also increase. New local levies or changes in assessment rates can similarly contribute to higher tax obligations, directly impacting the amount needed in your escrow account.

Homeowners insurance premiums can also increase due to various factors. These include inflation, a rise in claims within your geographical area, or changes in your policy’s coverage. Any increase in your annual insurance premium translates directly into a higher monthly amount collected for escrow.

An escrow shortage represents another common reason for an increased payment. A shortage occurs when the amount collected in your escrow account during the previous year was insufficient to cover the actual property taxes and insurance premiums paid out by your lender. This can happen if the initial estimates for these costs were too low, or if unexpected mid-year increases in taxes or insurance occurred. To rectify this shortfall, the mortgage servicer typically divides the shortage amount and adds it to your new monthly escrow payments, often spread over the next 12 months.

The Annual Escrow Analysis

Mortgage servicers conduct an annual escrow analysis to review and adjust your escrow payments. This process typically occurs once a year, often around the anniversary of your loan. The primary purpose of this analysis is to reconcile the actual expenses paid out for property taxes and insurance with the amounts collected from your monthly payments over the past year.

During this analysis, the servicer projects the anticipated costs for taxes and insurance for the upcoming 12 months. They also account for any required cushion, typically equivalent to two months of escrow payments, which serves as a buffer against unforeseen increases. This review ensures sufficient funds are collected, and you will receive an annual escrow analysis statement detailing these adjustments.

Deciphering Your Escrow Statement

This document provides a detailed breakdown of your escrow account’s activity and projected future costs. You will typically find information such as your previous monthly escrow payment, the newly calculated payment amount, and an itemized breakdown of the actual property tax and insurance payments made on your behalf. The statement also includes projections for the upcoming year’s expenses, showing how your lender estimates future tax and insurance outlays. It will clearly indicate if there was an escrow shortage from the prior year and how that amount is being recouped, or if there was a surplus.

To verify the information, you can contact your local county tax assessor’s office for current property tax details or reach out to your insurance provider for confirmation of your premium amounts. If you identify any discrepancies or require further clarification, contacting your mortgage servicer to request a review or explanation is the appropriate next step.