Why Did My Escrow Go Up?

How Does Escrow Work?

An escrow account works like a savings account, but it’s managed by your mortgage servicer. Not all homeowners have escrow accounts, but they’re generally required if you have a government-backed loan or a conventional mortgage with less than 20% equity.

If your mortgage includes an escrow account, your mortgage payment consists of two parts:

• Loan principal and interest payments: This part of your payment reduces your loan balance and covers your lender’s interest charges.
• Escrow account: This portion of your mortgage payment is set aside to pay property taxes and insurance—including homeowners, mortgage and, if required, flood insurance.

Together, these payments are known as principal, interest, taxes and insurance, or PITI.

Many mortgage lenders require an escrow account to protect their investment. The account gives them direct control of property tax and insurance payments to make sure you stay current on your insurance coverage and taxes.

Learn more >> How Does an Escrow Account Work?

Why Did My Escrow Payment Go Up?

If you have a fixed-rate mortgage and your payment suddenly increases, it may be related to escrow. Here are a few reasons why your escrow payment amount might change.

Change in Property Taxes

Local tax authorities periodically reassess property values—often every five years—and if your home’s assessed value increases, your property taxes will also rise. As a result, your escrow bill could go up to cover the higher taxes. You can appeal the increased property assessment if you think the new value is too high. The process varies depending on where you live, so contact your local assessor’s office to learn about the appeal process in your area and file a claim with your local independent board.

A local tax increase could also impact your property taxes. For example, voters might approve a local measure to fund the creation of new parks and recreational facilities by raising property taxes. You can’t control local tax policy, but it could help to follow local news so you can set aside extra money if you see a tax increase coming.

Homeowners Insurance Premiums Change

Your homeowners insurance premiums could go up if you add coverage, change your policy, make additions to your home or your insurer adjusts their rates. If you recently made a claim against your homeowners insurance, such as a roof replacement from storm damage, this also could cause your premiums to increase. This increase will be reflected in your escrow payment so there are enough funds for your homeowners insurance premiums.

There are several ways to save on homeowners insurance and lower your rate, such as raising your deductible, adding safety features to your home, qualifying for discounts, bundling policies and switching to a new provider.

Escrow Account Shortage

Mortgage servicers perform an annual escrow analysis to make sure the amount they collect from your escrow payment is sufficient to cover your property tax and insurance costs. If your escrow account is underfunded from the previous year, your lender may spread out the shortfall across your payments for the next year. If you want to avoid the higher payment, you can usually pay the escrow shortage with a lump-sum payment.

Escrow Reserve Adjustments

Lenders usually require your escrow account to have a small buffer for around three months of escrow payments. The purpose of this cushion is to cover any unexpected tax or insurance increases. If your reserve gets low, your mortgage service may increase your escrow payments to reestablish an adequate cushion.

While it’s less common, your escrow payment could also decrease if there’s an overage, such as when your property taxes or insurance premiums drop. In that case, your lender might issue you an escrow refund.

Learn more >> What Is an Escrow Refund?

Other Reasons Your Mortgage Payment Might Change

A change in escrow payment isn’t the only reason your mortgage payments could change. Here are some other common reasons why your mortgage payment might change:

• Your adjustable interest rate changes. After an initial period with a fixed interest rate, usually five, seven or 10 years, an adjustable-rate mortgage (ARM) enters a variable-rate period. If your mortgage payments recently changed, it could be because your loan is now adjusting its rate every six or 12 months based on the underlying index it’s tied to and the lender’s margin.
• You no longer have to pay PMI. If you took out a conventional mortgage with less than a 20% down payment, you’ve likely been paying private mortgage insurance (PMI) as part of your mortgage payment. If you’ve recently earned 22% equity in your home—the difference between your home’s market value and the amount you owe on your mortgage—your lender probably dropped your PMI, and your mortgage payments decreased accordingly. (You can ask your lender to remove PMI once you have at least 20% equity.)
• Your interest-only mortgage updates. This type of loan consists of a three- to 10-year period when you pay only the mortgage interest. Once this period ends, your mortgage moves into an amortization phase in which you make larger payments toward both principal and interest on the loan. If you have an interest-only mortgage, check your mortgage statement or contact your servicer to find out if your loan has recently transitioned to the amortization phase.
• You refinance your mortgage. Your monthly mortgage payments could change if you’ve recently completed a rate-and-term refinance. This loan modification is a popular way to lower your loan payments through a lower interest rate or a longer repayment term. However, your payments could be higher if you refinance to a shorter loan term.
• Your lender charges new fees. Your mortgage payments could rise if your lender charges new or higher servicing fees. Review your monthly mortgage statement fee details and ask your lender to remove any unwarranted fees.

The Bottom Line

One of the biggest challenges of homeownership is managing the various costs that come with it. Knowing how to manage unforeseen costs like higher escrow account payments, maintenance and repairs can help you budget for them appropriately. An adequately funded emergency fund can help cover unexpected expenses until you can adjust your budget or find a more permanent solution.