Why Did My Mortgage Escrow Increase?

Homeowners lookiing at their escrow increase letterYou open your mortgage statement and suddenly, your heartbeat quickens with a sudden surprise - your escrow payment has increased!

 The question Why Did My Escrow Payment Increase? leaps to mind, like an unwelcome guest. Escrow payments are typically fixed in stone, right? Or at least that's what you thought when you signed the dotted line on your mortgage loan agreement.

But here you are, staring down at a number bigger than it was just last month.

Reasons for Escrow Shortages

  • Escrow shortfalls happen when actual costs exceed the escrow contributions collected.
  • Payment increases are used to fund the shortage gap over time.
  • Shortages frequently result from unexpected tax or insurance premium increases.
  • Carefully review shortage notices and negotiate affordable repayment terms if needed.
  • Maintaining escrow cushions and monitoring cost changes helps minimize shortfalls.

Importance of Escrow Accounts

An escrow account is a unique account that your mortgage lender or servicer manages to pay recurring homeownership expenses on your behalf, such as:

  • Property taxes
  • Homeowners Insurance
  • Mortgage insurance (if applicable)

Each month, a portion of your mortgage payment goes into escrow. The funds are disbursed to the relevant parties when tax and insurance bills come due. Escrow accounts ensure these costs are paid on time.

Importance of Escrow Accounts for Mortgage Lenders

Mortgage lenders require escrow accounts for most home loans to protect their investments. By managing tax and insurance payments, lenders ensure policies don't lapse to maintain property value.

Lenders worry borrowers may forget to make payments without escrow, letting insurance lapse and taxes go unpaid, which could lead to defaults. An escrow account minimizes this risk.

Determining Escrow Payment Amount

When you close on the home, the lender estimates future tax and insurance costs to determine the monthly target escrow payment needed to cover upcoming bills.

They base this on your property value, location, and policy details. Your starting escrow payment is incorporated into your total monthly mortgage bill.

Common Causes of Escrow Shortages

The leading causes of an escrow account shortage include:

  • An increase in property taxes or insurance premiums beyond what was initially anticipated
  • Unforeseen one-time expenses paid via escrow, like repairs after an insurance claim
  • Changing from an existing escrow waiver to establishing a new escrow account

When actual costs exceed the escrow contributions, a shortage occurs. The lender will look to adjust your payment to cover the gap.

Adjusting Payments for Escrow Shortages

There are two main ways lenders modify monthly mortgage payments in response to an escrow shortage:

  1. Spread the shortage amount over 12–60 months. This minimally increases the payment to fund the shortage over time.
  2. Recalculate the payment: After analyzing updated tax and insurance costs, the price is raised to fully fund anticipated disbursements from escrow going forward. You'll receive a written notice explaining the new payment amount and the reason for the change. Make sure to review the shortage notices carefully.

Effects of Escrow Shortage on Monthly Payment

There is no standard shortage payment increase amount. The adjustment depends on factors like:

  • The magnitude of the unexpected tax or insurance premium hike
  • Whether the existing escrow balance can absorb a portion of the increase
  • If the lender spreads the shortage over time or recalculates the entire payment,

Increases can range from a few dollars to hundreds per month, depending on your situation. Carefully review the notice from your company.

Managing Payment Increases

If the new payment will stretch your budget too much, you may be able to:

  • Negotiate a more gradual payment increase over a longer timeframe.
  • Seek an interest rate reduction through loan modification to offset the hike.
  • Discuss waiving escrow and paying bills directly (if allowed).
  • Make a lump sum deposit to reduce the ongoing shortage spread amount.

Explore options with your lender to find an alternative solution that prevents mortgage default. Don’t ignore shortage notices.

Minimizing Escrow Shortages

Tips to minimize the chances of a shortage include:

  • Maintain a consistent monthly cushion equal to 2–6 months’ payments.
  • Proactively alert your servicer when you receive increased tax or insurance bills.
  • Consider paying bills directly if permitted and if you are financially disciplined.
  • Watch for tax assessment spikes after purchase and appeal if excessive.

Staying informed on factors impacting your escrow account helps avoid negative surprises and payment hikes.

Handling Escrow Shortages as a Homeowner

In conclusion, several factors can lead to an increase in your escrow payment. These can range from a rise in property taxes, an increase in homeowners insurance, or adjustments made due to an escrow shortage or surplus from the previous year.

It is crucial to understand these variables and review your escrow statement regularly to avoid unexpected increases. Remember that your mortgage company should provide annual escrow analysis statements for transparency on how your payments are managed.

If you notice any discrepancies or have questions regarding any increase, do not hesitate to reach out to your lender for clarification.