The Real Reason Your Escrow Payment Went Up
One of the most appealing features of homeownership is that it can give you a sense of security and stability that's almost impossible to find elsewhere in life. Your favorite sneakers, the oak tree at the end of the garden, careers, and relationships all seem fragile and changeable compared to the solidity of owning a chunk of brick and mortar.
It can be an intensely uncomfortable feeling then, finding out that your monthly payments are going up, even though you signed up for a fixed-rate mortgage. So why does this happen? According to US News, you have found yourself in an "escrow shortage."
The only way lenders make money from giving people mortgages is if those people pay them back. One of the ways that help mortgage providers ensure they will see a return on their loan is to set up escrow accounts. Per Rocket Mortgage, these accounts are set up to help homeowners spread out the largest single costs facing their home each year — usually property taxes and insurance, but there are other costs that can be included. Rather than pay your mortgage each month and still have to pay property tax in one lump sum each year and have another arrangement with insurers, an escrow account combines all of these into one simple, monthly payment.
What is an escrow shortage?
Each year, your mortgage lender will review your escrow account to ensure that the amount you'll pay over the year will cover the outlay for taxes and insurance. This has nothing to do with your principal or interest payments, which don't change in this process. What can happen, though, is that the rates of property tax and/or insurance premiums go up. In that instance, your monthly payments go up in order to make sure there's still enough money in the account to cover the costs.
It can also help to remember that escrow payments are actually calculated a year in advance, as noted by Money Tips. It's always a bit of an estimate because of this. Your lender isn't trying to punish you by increasing your escrow payments; rather, they are ensuring that you'll have enough in the account to cover the liabilities they can see coming.
But, if it's all an estimate made a year in advance, what if they get it wrong in the other direction? Wouldn't you be eligible for a refund? The short answer is yes! But as you've probably already guessed, this hardly ever happens. Increasing house prices generally mean higher insurance rates and tax brackets. If your payments are going down, it's usually because of a miscalculation, very friendly new tax laws in your area, or declining house prices.
What causes escrow shortages?
So what factors actually cause escrow payments to fluctuate like this? We can divide them roughly into two camps – predictable and unpredictable reasons.
Predictable reasons are factors that are directly connected to changes the homeowner makes to their home. You have access to your insurance policies and tax code, so you ought to be able to predict ahead of time that your escrow payments will change — even if you can't predict by exactly how much. For example, new security features might decrease insurance costs, but adding a pool can increase the risk of injury, therefore, the insurance costs would rise, according to The Ascent. The same goes for big home improvements adding value to your house price and pushing your property taxes to a new level. These things should be predicted and added to your budget for such projects.
Unpredictable reasons are the reasons all homeowners ought to keep a bit of money aside for the unexpected. Mistakes and accidents happen. Sometimes the bank's estimates are wrong, and sometimes premiums go up, but eventually, the balance must be settled. Most of the time, when there is a genuine error, though, your provider will offer some help to get you back on track. Taxes go up. Not all the time and not everywhere, but generally, that's what taxes do! This can be the government, a voters' decision, or just the local property values increase so much that your home is suddenly in a new tax band.