Escrow Accounts: Why Your Mortgage Payment Changed This Year

Many homeowners are surprised to see their mortgage payment rise on a fixed-rate loan. The culprit is almost always escrow: the account your servicer uses to pay property taxes and homeowners insurance on your behalf.

How an escrow account works

Each month, part of your payment goes into escrow. When your tax bill or insurance premium comes due, the servicer pays it from that account. Because tax and insurance costs change, the servicer reviews the account annually and resets your monthly deposit.

Common reasons your escrow payment went up

1. Property tax reassessment. A new assessment, the end of a new-construction tax break, or a higher local tax rate.
2. Homeowners insurance increases. Premiums have risen sharply in many states, especially areas exposed to storms, wildfires and hail.
3. A shortage from last year. If bills were higher than projected, the servicer collects the difference.
4. A lost exemption. Missing a homestead exemption renewal can raise your tax bill.
5. New flood insurance. A flood zone remapping can require coverage.

Shortage, deficiency and surplus

What you can do about a higher escrow payment

• Shop homeowners insurance. Compare quotes every year or two, raise your deductible if you have savings, and ask about bundling and protective device discounts.
• Appeal your property tax assessment if it's out of line with similar homes. See our property tax appeal guide.
• Claim exemptions for homesteads, seniors, veterans or disabilities where available.
• Pay a shortage upfront to keep the monthly increase smaller.
• Check the math. Errors happen, such as a tax bill paid twice or an old insurance premium used in projections.

Can you drop escrow altogether?

Some conventional loans allow escrow waivers if you have enough equity, often at least 20%, and a good payment history. A fee may apply. FHA and USDA loans generally require escrow; VA loans usually do in practice. Paying taxes and insurance yourself requires disciplined saving for large bills.

How to read your annual escrow statement

Your servicer's escrow analysis usually has three parts. The account history compares what the servicer projected last year with what was actually paid and when. The projection estimates the next 12 months of tax and insurance payments and shows the account balance month by month, including the lowest point. The new payment section shows your new monthly escrow deposit and any shortage or surplus adjustment.

Look for the projected low point. Servicers are allowed to keep a cushion, but the projected balance at its lowest month generally shouldn't exceed one-sixth of a year's escrow disbursements. If the low point seems high, or if a disbursement looks wrong, call your servicer and ask them to walk through the math.

A note for new homeowners

If you bought a newly built home, your first-year taxes may have been based on the value of the land alone. Once the county assesses the finished home, taxes can jump sharply, creating a large shortage in year two. Ask your lender at purchase whether your escrow was based on the completed value, and set aside extra savings if it wasn't.