When you first purchase a home, your mortgage payment might feel predictable. However, many homeowners are surprised when they see their monthly payment increase. If you’re experiencing this, it’s likely due to changes in your escrow, homeowners insurance, or property taxes. Let’s break down why these changes happen and how they affect your mortgage payment.
What Is Escrow and How Does It Work?
Escrow is a special account that your lender uses to collect and pay certain property-related expenses on your behalf. Instead of paying these expenses directly yourself, your mortgage payment often includes an escrow portion that covers:
- Homeowners insurance
- Property taxes
Each month, a portion of your mortgage payment goes into your escrow account. When your insurance premiums or property taxes are due, your lender uses the funds from your escrow account to pay them. This system helps ensure these essential bills are paid on time, without the homeowner having to remember multiple due dates.
Why Did My Monthly Mortgage Payment Increase?
If your mortgage payment increased unexpectedly, it’s usually due to one (or more) of the following reasons:
- Increase in Property Taxes
Property taxes are based on the assessed value of your home and the tax rates set by your local government. These rates can fluctuate from year to year due to changes in local budgets, infrastructure needs, or school funding. If your local government increases property taxes, your escrow account needs to cover the difference, leading to a higher monthly payment.
Solution: Review your property tax assessment to ensure it’s accurate. If you believe your home has been over-assessed, you may be able to appeal and potentially lower your tax bill.
- Higher Homeowners Insurance Premiums
Homeowners insurance premiums can rise for various reasons, including:
- Increased home value: If the cost to rebuild your home has gone up, your insurance provider may adjust your premium to cover the higher replacement value.
- Claims history: A higher number of claims in your area, or claims you’ve filed, can increase your insurance premiums.
- Market conditions: Inflation, natural disasters, or industry changes may lead to higher overall insurance costs.
If your insurance premium rises, your lender will increase the amount needed in your escrow account to cover the new cost, raising your mortgage payment.
Solution: Shop around for better homeowners insurance rates or consider raising your deductible to lower your premium.
- Escrow Shortage
Sometimes, your escrow account may not have enough funds to cover all your property taxes or insurance premiums due to unexpected increases in these costs. This is called an escrow shortage. When this happens, your lender typically does two things:
- Increases your monthly mortgage payment to cover the shortage and ensure future bills are paid.
- Offers you the option to pay the shortage in a lump sum to avoid raising your monthly payment further.
Solution: Review your escrow analysis statement to understand why there’s a shortage and decide whether to pay the difference in one lump sum or adjust your monthly payment.
- Annual Escrow Account Adjustment
Lenders conduct an annual escrow analysis to ensure they are collecting enough money to cover taxes and insurance. If they determine that they didn’t collect enough last year, they will adjust your payment upward to prevent future shortages. Sometimes this adjustment includes a buffer to cover any unexpected increases in property taxes or insurance.
How to Prepare for Escrow Changes
While no one can predict the exact amount your property taxes or insurance will increase, there are steps you can take to minimize surprises:
- Monitor local property tax trends: Stay informed about local tax changes and re-assessments.
- Review your homeowners insurance annually: Compare rates from different insurers to ensure you’re getting the best deal.
- Build a cushion: If you can, set aside a little extra each month for potential increases in your property taxes or insurance premiums.
What If My Payment Is Too High?
If your monthly mortgage payment increases due to escrow, insurance, or property taxes and you’re struggling to keep up, here are a few options to explore:
- Review your homeowners insurance: Shop for better rates or higher deductibles.
- Challenge your property tax assessment: If your home’s value has been overestimated, appealing could lower your taxes.
- Loan modification: In some cases, you can work with your lender to adjust your loan terms to make payments more affordable.
Escrow, homeowners insurance, and property taxes are all crucial elements of homeownership, but they can lead to unexpected changes in your monthly mortgage payment. Understanding these factors can help you prepare and avoid surprises. If you have questions or need help managing your mortgage, feel free to reach out to our team—we’re here to guide you every step of the way!
