Why Did My Escrow Payment Increase?

An escrow account, managed by your mortgage servicer, collects and disburses funds for property-related expenses not part of your loan’s principal and interest. These expenses specifically include property taxes and homeowner’s insurance premiums. This system ensures these recurring obligations are paid on time, protecting both the homeowner’s asset and the lender’s collateral. This article explains common causes of increases in monthly escrow payments and details their adjustment.

Primary Causes of Escrow Increases

Several factors can increase the costs covered by an escrow account, primarily stemming from changes in property taxes or homeowner’s insurance premiums. Property tax obligations can rise due to property reassessments, where local assessors re-evaluate a property’s market value for tax purposes. These reassessments, which can occur periodically, directly impact the taxable value, leading to higher tax bills. Even without a reassessment, local governmental bodies, such as municipalities and school districts, can adjust their tax rates, resulting in higher property tax payments. Additionally, some properties may benefit from temporary tax abatements; once these expire, the property becomes subject to its full assessed value, increasing the tax portion of the escrow payment.

Homeowner’s insurance premiums often increase due to economic and environmental trends. Inflation, coupled with rising material and labor costs for repairs and construction, increases insurer expenses, reflected in higher premiums. Increased frequency and severity of natural disasters, such as hurricanes, wildfires, and severe storms, also drive up claims activity in affected regions, prompting insurers to raise rates to offset higher payouts. Changes to the insurance policy itself, such as increasing coverage limits, adding specialized riders, or adjusting deductibles, will lead to higher premiums.

An escrow account increase can also stem from a shortage identified in the previous year’s account activity. If the mortgage servicer underestimated the prior year’s property tax or insurance expenses, or if these costs unexpectedly rose, the escrow account may have developed a deficit. This means the funds collected from the homeowner were insufficient to cover the actual disbursements made on their behalf. When such a shortage occurs, the servicer spreads this deficit amount over the next 12 months, adding it to the new monthly escrow payment to recoup the underpaid amount.

The Escrow Account Review Process

Mortgage servicers are required to conduct an annual review of each escrow account to ensure sufficient funds are collected to cover upcoming property tax and insurance payments. This process, often referred to as an escrow analysis, is mandated by federal regulations, specifically the Real Estate Settlement Procedures Act (RESPA). The analysis occurs annually, often around the anniversary of the loan’s origination or the previous year’s analysis.

During this annual review, the servicer projects the upcoming year’s property tax and homeowner’s insurance payments. They use the most recent tax bills and insurance premium statements to estimate the total amount needed for these disbursements over the next 12 months. This projection forms the basis for the new monthly escrow payment.

The servicer also compares the actual expenses paid from the escrow account over the past year against the total payments made into the account by the homeowner. This comparison identifies whether a shortage or a surplus exists in the account. If the disbursements exceeded the collections, a shortage is calculated. Conversely, if collections surpassed disbursements, a surplus is noted.

Federal regulations permit mortgage servicers to maintain a cushion in the escrow account, limited to one-sixth of the total annual disbursements, or approximately two months’ worth of escrow payments. This cushion serves as a buffer to absorb any unexpected increases in tax or insurance costs or to cover payments that may come due before sufficient monthly deposits have accumulated. The amount required for this cushion is factored into the calculation of the new monthly escrow payment.

The new monthly escrow payment is determined by combining the projected annual costs for taxes and insurance, adding any identified shortage from the previous year, and then incorporating the allowable cushion amount. If a surplus is identified, and it exceeds a certain threshold, the servicer is required to refund that amount to the homeowner; otherwise, it may be applied as a credit towards the next year’s payments.

Examining Your Escrow Statement

Your mortgage servicer is required to send you an annual escrow statement within 30 days of completing their escrow analysis. This document may be mailed to your home or made available through your servicer’s online portal.

Upon receiving the statement, first review the “account history” or “disbursements” section, which details property tax and insurance payments made from your escrow account over the past 12 months. Compare these recorded payments against your personal records, such as actual tax bills and insurance policy declarations, to ensure accuracy.

Next, examine the “projected future expenses” or “upcoming disbursements” section. This outlines the servicer’s estimates for your property taxes and homeowner’s insurance premiums for the upcoming year. These projections are the primary drivers of your new monthly escrow payment.

The statement will also indicate whether a shortage or surplus was identified during the analysis. If there is a shortage, the statement will detail the amount and explain how it will be collected by spreading it over the next 12 monthly payments. A surplus will show as a credit or indicate a refund will be issued. Finally, locate the breakdown of your new total monthly mortgage payment, specifically identifying the portion allocated to escrow.

To verify the accuracy of the servicer’s projections, compare the projected property tax amounts on your statement with your most recent property tax bill. Similarly, cross-reference the projected homeowner’s insurance premiums with the declaration page of your insurance policy. If you find any discrepancies between the statement and your actual bills, contact your mortgage servicer for clarification and potential adjustment.