Why Does the Escrow Payment Go Up?

Your monthly mortgage statement may show a changing payment, often due to an increase in the mortgage escrow account portion. Understanding why this happens helps homeowners manage finances. This article explains escrow accounts and common reasons for payment increases.

What an Escrow Account Is

An escrow account is a holding account managed by your mortgage servicer. It collects funds from your monthly mortgage payments for property-related expenses, primarily property taxes and homeowner’s insurance premiums.

Lenders require an escrow account to ensure these obligations are met. By collecting a portion of these costs monthly, the servicer pays bills on your behalf when due, protecting their investment. This helps homeowners avoid large, infrequent payments for taxes and insurance.

Reasons for Escrow Payment Increases

Escrow payment increases typically stem from rising property taxes, homeowner’s insurance, or past account discrepancies. Property taxes can increase due to various reasons, often beyond a homeowner’s direct control. Local government entities may raise tax rates to fund public services or because of increased property values. Property values can rise due to market demand, home improvements, or periodic reassessments by local tax authorities. For new construction, initial tax assessments might be based only on the land value, leading to a significant increase once the completed home is assessed.

Homeowner’s insurance premiums also increase. Factors like general inflation, the rising cost of building materials and labor for repairs, and an increase in claims within a specific area can drive up rates. Furthermore, a home’s location, susceptibility to natural disasters, or even changes in coverage can influence premium adjustments.

An escrow shortage is another common reason for an increase. A shortage occurs when the amount collected in the escrow account during the previous year was insufficient to cover the actual property tax and insurance disbursements made by the servicer. This deficit needs to be repaid, and servicers typically collect this shortage amount by dividing it over the next 12 monthly payments. This is in addition to the new, higher projected annual costs for taxes and insurance, resulting in a larger overall monthly escrow payment.

The Annual Escrow Analysis

Mortgage servicers conduct an annual escrow analysis to review account activity and adjust future payments. This yearly process compares actual amounts paid out for taxes and insurance against funds collected from the homeowner over the past year.

Based on this analysis, the servicer calculates projected expenses for the upcoming year. The monthly escrow payment is then adjusted to ensure sufficient funds are collected to cover these anticipated costs and maintain a required reserve. Federal regulations (RESPA) limit this cushion to one-sixth of total annual disbursements, roughly two months of escrow payments. Homeowners receive an annual escrow analysis statement detailing these calculations and any changes to their monthly payment.

Steps to Take When Your Payment Increases

When your escrow payment increases, first review the annual escrow analysis statement from your mortgage servicer. This document outlines the reasons for the change, including property tax and insurance premium adjustments, and any shortage calculations. Understanding these specifics clarifies the situation.

If you have questions or suspect an error, contact your mortgage servicer for clarification. They can explain the figures and methodology. If you suspect an incorrect property tax assessment, contact your local tax assessor’s office to inquire about valuation or appeal processes.

For homeowner’s insurance, exploring options with other providers may lead to a lower premium. Shopping around can result in significant savings, which could reduce future escrow payments. If an escrow shortage is identified, you can pay the full amount in a lump sum or allow the servicer to collect it over the next 12 months.