Understanding Why Your Escrow Payments Are High

Quick answer

• Your escrow payment can increase due to rising property taxes and homeowners insurance premiums.
• Lenders are required to review your escrow account annually and adjust payments to cover projected costs.
• Shortfalls in your escrow account can lead to a significant increase in your monthly payment.
• Unexpected increases can also occur if your lender underestimates future costs.
• Reviewing your escrow statement carefully can help you understand the changes.
• Consider shopping for new homeowners insurance or disputing property tax assessments if you believe they are too high.

Who this is for

• Homeowners who have received an unexpected increase in their monthly mortgage payment.
• Individuals who are confused by the components of their escrow payment.
• Homeowners looking for ways to potentially lower their housing costs.

What to check first (before you act)

Goal and timeline

What are you trying to achieve by understanding your high escrow? Is it to lower your monthly payment, budget more effectively, or dispute a specific charge? Knowing your objective will guide your research and actions. For example, if your goal is immediate cost reduction, you’ll focus on insurance shopping. If it’s long-term budget stability, understanding the components of your tax and insurance is key.

Current cash flow

Analyze your current monthly income and expenses. How much room do you have for increased housing costs? Understanding your overall financial picture will help you determine if the escrow increase is manageable or if significant adjustments are needed. This involves looking at all your bills, savings, and discretionary spending.

Emergency fund or safety buffer

Do you have an adequate emergency fund? A substantial increase in your escrow payment can strain your budget if you don’t have savings to fall back on. Ensure you have 3-6 months of living expenses saved. If not, building this buffer should be a priority, even if it means temporarily accepting the higher escrow.

Debt and interest rates

Are you carrying high-interest debt? While not directly related to escrow, managing debt is crucial for overall financial health. If your escrow has increased and you’re struggling to make ends meet, prioritizing high-interest debt repayment might be necessary. Consider whether any extra funds could be better allocated to debt rather than other savings goals.

Credit impact

Understand how late payments or insufficient escrow funds could impact your credit score. While escrow is managed by your lender, failure to pay your full mortgage, which includes escrow, can have severe credit consequences. Ensure you are making timely payments to protect your creditworthiness.

Step-by-step (simple workflow)

1. Obtain your escrow statement

What to do: Request your most recent escrow statement from your mortgage lender. This document details all the payments made into and out of your escrow account over the past year.
What “good” looks like: You have a clear, itemized statement showing your beginning balance, payments received, disbursements for taxes and insurance, and ending balance.
A common mistake and how to avoid it: Not receiving or understanding the statement. Avoid this by proactively contacting your lender and asking for a detailed explanation of each line item.

2. Review property tax assessments

What to do: Examine the property tax portion of your statement. Note the amount paid and the tax year it covers. Compare this to previous years and your local tax authority’s published rates.
What “good” looks like: The tax amounts align with your local tax authority’s records and show a reasonable increase, if any.
A common mistake and how to avoid it: Assuming the tax bill is always correct. Avoid this by cross-referencing with your county or city tax assessor’s office and understanding how your property’s assessed value is determined.

3. Understand homeowners insurance premiums

What to do: Look at the homeowners insurance payments on your statement. Note the insurer, policy number, coverage amount, and premium cost.
What “good” looks like: The insurance premium is consistent with your policy and shows a normal annual increase, if any.
A common mistake and how to avoid it: Overlooking increases in insurance costs. Avoid this by actively shopping for homeowners insurance annually or biennially to compare rates and coverage.

4. Identify escrow account shortfalls

What to do: Check if your statement indicates a shortage or deficit in your escrow account. This is often a primary driver for increased payments.
What “good” looks like: Your escrow account has a healthy balance or a minimal surplus, indicating no need for a significant adjustment.
A common mistake and how to avoid it: Missing the notification of a shortfall. Avoid this by carefully reading all correspondence from your lender, especially annual escrow analysis statements.

5. Analyze lender’s escrow analysis

What to do: Your lender is required to perform an annual escrow analysis. Review their projection for the next year’s tax and insurance costs.
What “good” looks like: The lender’s projections appear reasonable and account for known increases.
A common mistake and how to avoid it: Not questioning the lender’s projections. Avoid this by understanding that lenders may build in a cushion, and their estimates might be higher than actual costs.

6. Calculate your new monthly payment

What to do: Use the escrow analysis to understand how the projected costs translate into your new total monthly mortgage payment (principal, interest, taxes, and insurance).
What “good” looks like: You can clearly see how the escrow portion has changed and how it impacts your overall payment.
A common mistake and how to avoid it: Not understanding the breakdown. Avoid this by asking your lender to explain the calculation of the new payment, specifically the escrow portion.

7. Explore options to lower property taxes

What to do: If your property taxes have increased significantly, investigate if you can appeal your property’s assessed value or if any exemptions apply to you.
What “good” looks like: You identify a valid reason and process to appeal your tax assessment or qualify for tax relief.
A common mistake and how to avoid it: Not exploring appeals. Avoid this by researching your local tax assessor’s appeal process and deadlines.

8. Shop for new homeowners insurance

What to do: Get quotes from multiple insurance providers for homeowners insurance. Compare coverage, deductibles, and premiums.
What “good” looks like: You find a policy with comparable or better coverage at a lower premium.
A common mistake and how to avoid it: Sticking with the same insurer out of habit. Avoid this by treating your homeowners insurance like any other bill and shopping around regularly.

9. Discuss with your mortgage lender

What to do: If you believe there’s an error or if you have concerns about the escrow analysis, contact your lender to discuss it.
What “good” looks like: Your concerns are addressed, and any discrepancies are clarified or corrected.
A common mistake and how to avoid it: Not communicating with your lender. Avoid this by proactively reaching out with specific questions or concerns.

10. Adjust your budget

What to do: Based on your new monthly payment, adjust your personal budget to accommodate the change.
What “good” looks like: Your budget reflects the new reality, and you are confident in your ability to meet your financial obligations.
A common mistake and how to avoid it: Ignoring the increased cost. Avoid this by making necessary adjustments to other spending categories to absorb the higher housing expense.

Common mistakes (and what happens if you ignore them)

| Mistake | What it causes | Fix