Escrow Shortages: Why Your Mortgage Payment Went Up When Your Rate Didn't
A fixed-rate mortgage payment can still rise when property taxes or insurance premiums increase. Here is how escrow analysis works and why one increase can raise the payment twice.
You have a fixed-rate mortgage, so your payment shouldn't change. Then a letter arrives saying it's going up by $200 a month. The reason is almost always your escrow account.
What escrow does
Many mortgages include an escrow account. Each month, part of your payment goes into it, and the servicer uses that money to pay your property taxes and homeowners insurance when they're due. Your total payment is principal and interest, which stays fixed on a fixed-rate loan, plus the escrow portion, which changes when taxes or insurance change.
Servicers review the account at least once a year in an escrow analysis. They project the next year's bills and compare them with the account balance.
How a shortage raises the payment twice
Hypothetical numbers. Last year, the servicer expected:
Then taxes rose to $5,400 and insurance to $2,600:
Show the numbers behind this chart
| Escrow portion | |
|---|---|
| Last year | $567 |
| Next year: new bills | $667 |
| Next year: plus shortage repayment | $767 |
The payment goes up twice: once to cover the higher bills going forward, and again to repay the shortfall from last year. After the shortage is repaid, the second part disappears, as long as bills don't rise again.
The cushion
Federal rules let servicers keep a cushion in the escrow account, generally no more than one-sixth of the year's estimated disbursements, about two months' worth. If the projected low point of the account falls below that cushion, the analysis may also add to your payment.
Your options
- Spread it over 12 months, the default in many cases.
- Pay the shortage in a lump sum. Many servicers then lower the monthly payment to cover only the new, higher bills.
- Check the numbers. Compare the tax and insurance amounts in the analysis with your actual tax bill and insurance declarations page.
- Challenge your assessment if you think your property's assessed value is too high. Local appeal deadlines are usually short.
- Shop insurance if the premium increase was large, making sure coverage stays adequate and your lender's requirements are met.
Surpluses
If the account has more than it needs, the servicer generally must refund a surplus above a small threshold, if you're current on payments.
The takeaway
On a fixed-rate loan, payment increases usually come from escrow. Rising taxes or insurance raise the payment going forward and can add a temporary shortage repayment on top. Read the escrow analysis, check its figures, and consider paying a shortage upfront if you want the smaller monthly increase.
Keep reading
Balance Transfers: When the Fee Is Worth It, and the Traps That Erase the Savings
Moving a high-rate card balance to a 0% promotional offer can save real money, but transfer fees, the promo end date, and new spending decide whether it works. Here is the math on an $8,000 balance.
Guide, 4 min read
Budgeting Methods Compared: 50/30/20, Zero-Based, Pay Yourself First, and Envelopes
There is no single right way to budget. Here is how the four most common methods work on the same $6,000 monthly take-home pay, what each is good at, and where each one breaks.
Guide, 3 min read
Building Credit From Zero: A Step-by-Step Plan for a Thin or Empty Credit File
Without a credit history, it's hard to get credit, and without credit, it's hard to build history. Here are the tools that break that loop, how long building takes, and the mistakes that set people back.
Guide, 3 min read