If your mortgage payment increased recently, you’re not alone. I have been told by more than one person that they have gotten a notice in the mail from their lender informing them that their mortgage payment was increasing and it was a result of an adjustment with their escrow account. One homeowner even had their mortgage payment go up by $60 a month due to this "adjustment" in their escrow account.
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This leads to the question: Why does your escrow account go up (or down) and is there anything you can do about it?
When you buy a home, most of the time your lender will require you to have an escrow account. In simple terms, an escrow account is a third-party account that holds funds that you will deposit to pay property taxes and monthly homeowners insurance. Also, by rolling an escrow payment into your monthly mortgage payment, a homeowner only has to worry about one monthly bill rather than a separate bill for a principal and interest payment, a taxes payment and a homeowners insurance payment.
After you first get your mortgage, the lender will generally require you to deposit 12 to 14 months payments of homeowners insurance and 6 to 12 months payments of property taxes into the escrow account and also require you to pay monthly into the escrow account as well.
Most Common Reason for Escrow Shortage
The most common reason for a significant increase in a required payment into an escrow account is due to property taxes increasing or a miscalculation when you first got your mortgage. Property taxes go up (rarely down, but sometimes) and as property taxes go up, so will your required payment into your escrow account.
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For example, suppose you bought a newly-built house in 2011. The tax assessment on the property may only take into consideration the land value. But, when the property is assessed again, it will include the land value plus the value of your home, which will increase your property taxes and, as a result, increase your escrow payment.
Other Reasons for Escrow Shortages
The other possible reasons for having a shortage in your escrow account include a rise in homeowners insurance fees (usually small) and a miscalculation of your escrow payment when you originally took out your loan, which could be big or small depending on the error.
Regardless of whether or not your escrow adjustment is large or small, you are obligated to pay the increase because these are bills that you as a homeowner owe; the lender has simply agreed to pay them on your behalf and then collect the money from you as a courtesy.
Does your escrow payment ever go down? Yes, but unfortunately not nearly as often as they go up. The most common reason for a decrease in your escrow payment each month also has to do with taxes. When your property is assessed at a lower value due to decreased property values, your lender will notify you that your property tax bill went down and, as a result, your escrow payment decreased.
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So in the event that you receive a notice from your lender that your monthly mortgage payment is increasing due to a rise in your escrow payment, chances are that it is related directly to the assessed tax value of your property—and yes, it is something that you are obligated to pay. It reminds me of the old saying: "Nothing in life is certain except for death and taxes." Which can lead to a direct increase in your monthly escrow payment. (See How to Lower Your Property Taxes)