Why Is My Escrow Going Up? Key Factors and What to Do

A mortgage escrow account is a dedicated fund managed by your lender to cover specific property-related expenses. Each month, a portion of your mortgage payment is deposited into this account, ensuring funds are available for your property taxes and homeowners insurance premiums when they come due. This arrangement simplifies financial management by consolidating these significant periodic costs into regular, manageable payments. The account safeguards the lender’s investment by ensuring taxes are paid and insurance remains active. Understanding why your escrow payment might increase is important for homeowners. This article explores the common reasons behind these increases.

Key Factors Driving Up Escrow Payments

Escrow payments primarily increase due to external changes in the costs they cover, namely property taxes and homeowners insurance. These underlying expenses are subject to various influences that can lead to significant fluctuations.

Property Taxes

Property taxes represent a substantial component of escrow payments and are a frequent cause of increases. Local governments assess property taxes based on the property’s fair market value, multiplied by an assessment ratio and a specific tax rate. Increases in property taxes frequently occur due to rising property values, which can result from general market appreciation or improvements made to the home. Local government budgets and levies also play a role, as increased spending needs for public services can lead to higher tax rates. Assessors periodically re-evaluate property values, which can also trigger an increase in the tax bill.

Homeowners Insurance Premiums

Homeowners insurance premiums are another significant factor contributing to escrow increases. These premiums are determined by assessing various risk factors associated with the property and its location, including the property’s value and the amount of coverage needed. Common reasons for rising insurance costs include general inflation, which drives up the cost of rebuilding materials and labor. An increase in the frequency or severity of natural disasters in a specific region also leads to higher premiums as insurers face more claims. Changes in an insurance provider’s overall risk assessment or an increase in the number of claims filed in a particular area can also result in higher rates for homeowners.

Understanding Escrow Account Adjustments

Beyond the external factors of taxes and insurance, internal mechanics of the escrow account itself can lead to increased monthly payments. This often involves addressing a “shortage” or “deficiency” within the account.

Escrow Shortage

An escrow shortage occurs when the actual amounts paid out for property taxes and homeowners insurance during the past year exceeded the funds collected in the escrow account. This situation can arise if the mortgage servicer initially underestimated future tax or insurance costs. Unexpected mid-year increases in property taxes or insurance premiums that were not immediately reflected in the monthly escrow collection can also contribute to a shortage. For instance, a sudden rise in rebuilding costs due to inflation or a significant local tax reassessment could create a deficit.

Recouping a Shortage

When a shortage is identified during the annual escrow analysis, the mortgage servicer calculates a new monthly payment. This new amount is designed to cover not only the anticipated higher costs for the upcoming year but also to recoup the accumulated shortage. Typically, the shortage amount is spread out and added to the monthly mortgage payment over a 12-month period. Additionally, servicers are permitted to maintain a “cushion” in the escrow account, usually equivalent to two months of escrow payments. This cushion helps absorb minor, unforeseen increases in taxes or insurance without immediately triggering another shortage.

Navigating Your Escrow Statement and Options

Receiving notice of an increased escrow payment can be concerning, but understanding the steps to take can help homeowners manage the situation. The first action involves a thorough review of the annual escrow analysis statement.

Reviewing Your Statement

This statement, typically sent annually, provides a detailed breakdown of your escrow account’s activity. Carefully examine sections that show the actual expenses paid out for taxes and insurance in the previous year, alongside the projected expenses for the upcoming year. The statement will also clearly indicate if there is a calculated shortage or surplus in your account. Understanding these figures is the foundation for addressing any payment changes.

Contacting Your Servicer

If the statement is unclear or if you suspect an error, contacting your mortgage servicer is the next step. When communicating, have your escrow analysis statement readily available, along with any relevant property tax bills or insurance declarations. This information will help the servicer address your specific concerns efficiently.

Exploring Solutions

Exploring potential solutions can help mitigate the impact of increased escrow payments. For property taxes, homeowners can contact their local tax assessor’s office to understand the details of their property assessment and current tax rates. If you believe the property assessment is incorrect or disproportionately high, you may appeal it. For homeowners insurance, comparing quotes from different insurance providers is advisable. Shopping around can reveal opportunities for comparable coverage at a lower premium, potentially reducing the escrow burden.

If an escrow shortage is the primary reason for the increase, servicers generally offer the option to pay the shortage in a lump sum. While the shortage is typically spread over 12 months and added to your monthly payment, paying it upfront can prevent a higher monthly obligation, though your overall payment may still increase if the underlying tax or insurance costs have risen.