Why Does Your Escrow Payment Go Up Every Year?
Understand why your mortgage escrow payment changes annually and how to manage these adjustments effectively. Get insights into your homeownership costs.
An escrow account, often part of a mortgage payment, serves as a holding place for funds designated to cover property taxes and homeowner’s insurance. This arrangement allows a lender to manage these recurring expenses on behalf of the homeowner, ensuring timely payments and protecting their investment in the property. While it might seem that your escrow payment consistently increases, these adjustments are a normal part of homeownership and reflect changes in the underlying costs of maintaining a home.
Why Escrow Amounts Change
The primary drivers behind changes in your escrow payment are alterations in property taxes and homeowner’s insurance premiums. Property taxes, determined by local government entities, can increase due to rising assessed home values or changes in the local tax rate. Home improvements or a general increase in property values can lead to higher tax assessments.
Homeowner’s insurance premiums can also increase due to various factors. Inflation and rising costs for building materials and labor directly impact the expense of repairing or rebuilding a home, leading insurers to adjust rates. A rise in the frequency or severity of weather-related claims in a specific region can also cause insurance companies to increase premiums. Some escrow accounts might also cover costs such as Private Mortgage Insurance (PMI), which protects the lender if a homeowner defaults, or Homeowner’s Association (HOA) dues. Changes in these amounts can further affect the total escrow payment.
How Escrow Accounts Are Adjusted
Mortgage servicers conduct an annual escrow analysis to ensure sufficient funds are collected to cover anticipated property taxes and insurance premiums. This yearly review compares the previous year’s actual expenses with the projected expenses for the upcoming 12 months. Federal regulations, the Real Estate Settlement Procedures Act (RESPA), govern how lenders manage escrow accounts.
If the analysis reveals a “shortage,” meaning the account did not collect enough to cover the actual expenses, the lender will adjust the monthly payment to recoup this deficit and cover future costs. This shortage can be spread out over the next 12 months, increasing your monthly mortgage payment. Conversely, if a “surplus” exists because more money was collected than needed, lenders are required to refund the excess amount within 30 days. Lenders are required to provide an annual escrow disclosure statement detailing the analysis, showing the historical activity and projections for the next year, along with any resulting shortage or surplus.
Homeowner Actions Regarding Escrow
Homeowners should carefully review their annual escrow analysis statement upon receipt to ensure accuracy. This document provides a detailed breakdown of the previous year’s actual expenses and the projections for the coming year. If discrepancies or questions arise, contacting the mortgage servicer for clarification is an important step.
Proactive measures can also help manage escrow costs. Homeowners can seek new quotes for homeowner’s insurance to potentially find a lower premium. If a property tax assessment appears incorrect or significantly higher than comparable homes, homeowners may have the option to appeal the valuation with their local tax authority. Some homeowners might also choose to make a one-time payment to cover an identified escrow shortage rather than having the amount spread across their monthly payments for the upcoming year.