Many homeowners are surprised when they receive their annual escrow analysis and notice an increase in their monthly mortgage payment. If you’ve recently asked yourself, ‘Why did my escrow go up?’ you’re not alone. The change might seem unexpected, but escrow adjustments are a normal part of homeownership. They reflect changes in the costs covered by your escrow account, not arbitrary decisions by your lender. Understanding the components of an escrow account and why it fluctuates can help you better manage your finances and avoid future surprises.
What Is an Escrow Account?
An escrow account is a separate account set up by your mortgage lender to collect and pay property-related expenses on your behalf. These typically include:
- Property taxes
- Homeowners insurance premiums
- Mortgage insurance, if applicable
Each month, a portion of your mortgage payment is deposited into the escrow account. When taxes and insurance premiums are due, your lender uses the funds in this account to pay them directly. The goal is to ensure these expenses are paid on time and reduce the risk of default.
Common Reasons Why Your Escrow Went Up
1. Increase in Property Taxes
One of the most common reasons for an escrow increase is a rise in property taxes. Property taxes can increase due to several factors:
- Local government budget increases
- Changes in your property’s assessed value
- New school bonds, infrastructure projects, or community improvements
If your local tax authority raises the property taxes, your lender needs to collect more money each month to cover the increased bill. Even a small change in your property tax rate can make a noticeable difference in your monthly escrow requirement.
2. Higher Homeowners Insurance Premiums
Insurance companies periodically adjust premiums based on inflation, replacement cost values, and regional risks. If your insurance provider increases your annual premium, your lender will also need to increase your monthly escrow contributions to ensure there’s enough money to pay the new premium amount.
In areas prone to natural disasters like hurricanes, wildfires, or floods, insurance premiums can rise rapidly due to increased risk or new coverage requirements imposed by your insurer.
3. Escrow Shortage or Deficiency
Another factor that could cause your escrow payment to go up is an escrow shortage or deficiency. Here’s how that works:
- Escrow shortage: Occurs when your account does not have enough funds to cover the projected expenses for the upcoming year.
- Escrow deficiency: Happens when your account had a negative balance from the previous year.
To fix this, lenders either require you to pay the shortage in a lump sum or spread it out over the next 12 months by increasing your monthly escrow payment.
4. New Escrow Requirements
Sometimes, new escrow items may be added, especially if your lender requires additional coverage. For example, if you previously waived flood insurance but it’s now required by your mortgage company, your monthly escrow will increase to accommodate this new cost.
Additionally, changes in mortgage insurance requirements such as the addition of PMI (Private Mortgage Insurance) can also raise your escrow contributions.
How Escrow Analysis Works
Mortgage lenders conduct an escrow analysis at least once a year. During this process, they review:
- Past year’s actual expenses
- Projected expenses for the coming year
- Current balance of your escrow account
If your account had a surplus, you might receive a refund. But if there’s a shortage or your upcoming bills are expected to rise, your monthly payment will go up to cover the difference.
Can You Avoid Escrow Increases?
While you can’t control every factor, there are ways to minimize unexpected increases in escrow payments.
1. Appeal Your Property Tax Assessment
If you believe your property was overvalued, you can file an appeal with your local tax assessor. If successful, your tax bill and therefore your escrow payment could decrease.
2. Shop for Lower Insurance Rates
Periodically compare homeowners insurance rates. Switching providers or adjusting your coverage could lower your premium and reduce your escrow requirement.
3. Pay Shortages Upfront
If you’re given the option, consider paying any escrow shortage or deficiency in a lump sum. This prevents your monthly mortgage payment from increasing more than necessary.
4. Monitor Your Escrow Account
Keep track of your escrow account activity and compare it to tax and insurance bills. Being proactive can help you spot potential increases before they impact your payment.
What to Do When Escrow Goes Up
If your lender informs you that your escrow amount is increasing, take the following steps:
- Review the escrow analysis statement in detail
- Compare the new property tax and insurance amounts to previous years
- Contact your insurance provider to confirm rate changes
- Ask your lender for options if you’re unable to afford the new payment
In some cases, you might be eligible to remove certain escrow items if allowed by your mortgage agreement, though this often depends on your loan-to-value ratio and payment history.
Is It Normal for Escrow to Fluctuate?
Yes, it’s completely normal for escrow payments to change annually. Property taxes and insurance premiums are not fixed, and even a small change in either can affect your total monthly mortgage payment. Escrow is designed to adjust with these changes, so your bills are paid on time without you needing to manage multiple due dates throughout the year.
It’s important not to panic when your escrow increases. Instead, focus on understanding the underlying reasons, reviewing your options, and planning accordingly. If you’re unsure about any aspect of your escrow account, don’t hesitate to reach out to your lender for clarification.
When asking ‘Why did my escrow go up?’, the answer usually lies in increases to property taxes, homeowners insurance, or a shortage from the previous year. Although these increases may come as a surprise, they are a routine part of homeownership. By staying informed, regularly reviewing your statements, and managing your expenses, you can reduce the impact of escrow fluctuations and maintain better control of your monthly budget. Understanding your escrow account is key to avoiding confusion and making informed financial decisions as a homeowner.