Your payment notification arrived and it was $180 higher than last month. No warning. No explanation in the email. The culprit is almost always your escrowAn account your servicer uses to pay your taxes and insurance.Click to open the full glossary. account. Once you understand how it works, the surprise never happens again.
What your escrow account actually does
With a home loan, your lender will want an escrow account. It is a fund they hold for you. Each month, part of your payment goes in. Once or twice a year, they take money out to pay your property taxesA yearly tax on your home, based on what your county says it is worth.Click to open the full glossary. and homeowners insurance premiums directly to the relevant parties.
This helps you both. You never have to save up for a big tax bill twice a year. And your lender knows the bills get paid, which keeps the home safe.
The annual escrow analysis
Once a year, your loan servicerThe company you actually send your payment to.Click to open the full glossary. performs an escrow analysisThe yearly check that resets how much escrow you pay each month.Click to open the full glossary.: what they took in, set against what they paid out. Plus what they think next year will cost. This is the point where your bill changes.
Say your county raises your assessed value. That is common after a sale, when local budgets rise, or when the tax rate goes up. Your escrow payment has to rise with it. The same happens when your homeowners insurance renews at a higher premium. Your servicer now needs more each month to cover the bills it pays on your behalf.
The law says your lender has to send you an escrow letter each year. It shows what they plan to pay out. It shows your balance. And it shows your new monthly escrow. Look for it in January or February. Or look for it on the date your loan began.
Shortage vs. surplus: what each means
You have a shortage
A shortage means your escrow account does not hold enough to pay the year ahead. That happens when your property taxes or your insurance premium go up. It also happens when the account balance runs low. Your annual escrow statement will offer you two ways to clear it:
- Pay the shortageYour escrow ran short, so your payment goes up to catch up.Click to open the full glossary. as a lump sum. This is often the better call, if you can spare the cash. It keeps your monthly bill down.
- Spread the deficit over 12 months. Your lender splits the gap over 12 months and adds it to your bill. This is the top cause of a sudden jump.
You have a surplus
If your account has more than $50 in excess (the RESPA minimum), your lender is required to send you a refund check or apply the surplus to your next payment. A surplus usually happens when taxes or insurance came in lower than projected, or you made extra payments.
"An escrow shortage isn't a penalty. It's a catch-up. The money was always going to be owed. The question is when."
The cushion requirement
Lenders are permitted under RESPA to maintain a cushion in your escrow account as a reserve against unexpected disbursements. The maximum allowed cushion is two months' worth of projected annual escrow payments. That is why your escrow is never zero, even when all the bills are paid. It is meant to work that way. The money is yours. It just waits there for the next bill.
Enter your escrow payment, property tax, and insurance in our free escrow shortage calculator to see whether you're headed for a shortage or a surplus. No signup required.
What you can do about it
You're not helpless when an escrow change arrives. Two avenues are worth pursuing:
Appeal your property tax assessment
Many owners pay too much tax, just because they never push back. Most counties let you appeal each year. And you win more often than you might think. That goes double if homes like yours sold for less. Each county does it a bit differently. Most want a form and a few sales to back you up. A win can cut your yearly tax bill by hundreds. It cuts your escrow too.
Shop your homeowners insurance
Home insurance prices vary a lot from one carrier to the next. Renewing with the same one each year is easy, and it is rarely the best price. So get quotes from two or three others every year. Do it after you add an alarm, after you fix up the house, or after your credit score goes up. A lower premium means a lower escrow payment too.
You don't have to wait for the annual cycle. If you've paid a shortage or lowered your insurance, you can request an interim escrow analysis from your lender at any time. They do not have to say yes right away. But most will, if the change is a big one.
The galling part is that these shocks are easy to dodge. You just have to see them coming. We watch your escrow balance. We watch how tax values move near you. Then we warn you weeks before that letter lands, while you can still act.
Never be blindsided by a payment change again
CasaCrow watches your escrow and alerts you before your payment shifts.
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