Yikes, why did my escrow go up so much? If you’re asking this question, believe me, you have plenty of company. Many homeowners across America have been hit with escrow increases over the last few years. We’ll explain the most common reasons escrow increases and some ways to possibly reduce your escrow costs.
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What is An Escrow Account?
An escrow (or “impound”) account is set up by your mortgage lender for purposes of paying your property taxes and homeowners insurance on your behalf.
When you pay your mortgage payment, your lender diverts the escrow portion of the payment into your escrow account. Once your taxes and insurance come due, your lender pays them on your behalf out of your escrow account.
Lenders like it when you have an escrow account because it helps ensure that your property taxes are paid and your home stays insured. This protects their interest in the property.
If your home catches fire and burns down, your lender wants to make sure that you have homeowners insurance coverage to rebuild it. Your home is the collateral for your mortgage, so your lender wants to make sure their investment (the mortgage) is protected.
Lenders also want to make sure your property taxes are paid. If they’re not, the county could foreclose and potentially wipe out the mortgage. Obviously, that would be a huge financial hit for the lender, so they want to make sure your property taxes are paid on time.
When Escrow Accounts Are Required
Escrow accounts are always required on FHA mortgages. For VA mortgages, escrow accounts are typically required, but there are some circumstances where they can be waived. For conventional loans, escrow accounts are usually only required for LTVs higher than 80%.
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Why Did My Escrow Go Up?
Mortgage lenders have strict requirements they have to comply with when it comes to managing escrow accounts. Your escrow account can’t have too much or too little money, it has to be just right.
If your mortgage escrow account payment increased, it’s because your lender recalculated your escrow payment to make sure there is enough money available to cover your property taxes and homeowner’s insurance.
Let’s cover the three most likely reasons homeowners experience an escrow increase.
1) Property Taxes
Home values have increased substantially over recent years. We all love to see our homes increase in value, but the downside is higher property taxes.
Property taxes are usually assessed as a percentage of your home’s value. The county periodically reassesses home values to make sure they’re maximizing property tax collections.
If your home value has increased substantially in recent years, it’s possible that the county has reassessed your home and hit you with a property tax increase.
Your property taxes may also increase if:
- You bought new construction – When you buy a new home, your property taxes for the first year or two are often based on the land value before the home was built. When the county finally gets around to reassessing the improvements (the new home) on your property, it can result in a big property tax increase, which results in a big escrow increase.
- You’ve done home improvements – If you pulled permits to add on or do major improvements to your home, it could trigger a reassessment that increases your property taxes, which could cause your escrow to go up.
You can confirm if your property taxes have increased by searching for your tax bill on your county’s tax collector website. Most counties offer online access to current and past property tax bills.
2) Homeowner’s Insurance
Massive government stimulus during the COVID-19 pandemic sparked aggressive and persistent inflation as the pandemic subsided. This has caused the cost of almost everything we purchase to increase, including gas, food, utilities, insurance, construction materials, etc.
Insurance companies have seen their costs increase as well. They now have to pay more to settle claims because the cost to repair and rebuild homes has increased.
If you live in Florida, you’ve probably been hit with huge insurance premium increases because of hurricane damage over the last few years.
When insurance companies see their costs increase, they have to raise insurance premiums, which causes your escrow costs to increase.
3) Your Lender Messed Up
This isn’t common, but it does occasionally happen. If your taxes and insurance haven’t increased, it’s possible that your lender simply goofed. They may not have collected enough for your escrow account, so they’re trying to get it caught up. You may want to contact your lender to confirm if this is the case.
How to Reduce Escrow Payments
Nobody likes to pay more than they have to for their escrows, so it’s important to take advantage of every opportunity you can to save money. Here are a few ways you may be able to reduce your escrows:
- Contest your property tax assessment – If you have legitimate reasons to believe the county has overvalued your property, you may be able to contest their assessment. Keep in mind that they won’t just take your word for it; they’ll want actual proof. You probably have the best shot at reducing your property taxes if you have an appraisal that shows a value less than the county assessed value.
- Tax exemptions – Many counties offer tax exemptions for military service, age, disability status, etc. If you live in your home (i.e., it’s not a rental property) make sure you take any homestead exemptions offered by your county. Contact your county tax collector to make sure you’re taking advantage of all the tax exemptions you have available.
- Get cheaper homeowner’s insurance – If your homeowner’s insurance has increased, it may be worth shopping around for a cheaper policy. If you can get the same coverage for less, you’ll be able to reduce your escrow costs.
- Get your own insurance – If you lose your insurance coverage, your lender will likely buy you an expensive “force-placed” policy to make sure your home stays insured. If this has happened to you, the easiest way to save on escrow costs is to get your own insurance policy. Force-placed insurance tends to be very expensive.
The money in your escrow account is your money. When you pay off or refinance your mortgage, any remaining cash in your escrow account is sent back to you.
Frequently Asked Questions
Why did my escrow increase so much?
Escrow increases are typically the result of a large increase in property taxes, homeowner’s insurance, or both. You may be able to lower your escrow payment by contesting your property tax assessment or shopping around for cheaper homeowner’s insurance.
How can I lower my escrow payment?
Escrow increases are most commonly the result of an increase in property taxes or homeowner’s insurance. It may be possible to lower your escrow payment by contesting your property tax assessment or shopping around for cheaper homeowner’s insurance.
Why did my mortgage go up 300 dollars?
Assuming your mortgage is a fixed-rate mortgage, your payment probably went up because your property taxes and homeowner’s insurance increased and your lender needs to collect more money for your escrow account. Escrow increases are typically the result of a large increase in property taxes, homeowner’s insurance, or both. You may be able to lower your escrow payment by contesting your property tax assessment or shopping around for cheaper homeowner’s insurance.
Why did my mortgage go up $400?
If your mortgage is a fixed-rate mortgage, your payment probably increased because your property taxes and homeowner’s insurance increased and your lender now has to collect more money for your escrow account. Escrow increases are typically the result of a large increase in property taxes, homeowner’s insurance, or both. You may be able to lower your escrow payment by contesting your property tax assessment or shopping around for cheaper homeowner’s insurance.
Why did my mortgage go up?
Assuming your mortgage is a fixed-rate mortgage, your payment probably went up because your property taxes and homeowner’s insurance increased and your lender needs to collect more money for your escrow account. Escrow increases are typically the result of a large increase in property taxes, homeowner’s insurance, or both. You may be able to lower your escrow payment by contesting your property tax assessment or shopping around for cheaper homeowner’s insurance. If your loan is an adjustable-rate mortgage, it’s possible that your mortgage payment increased because of higher interest rates.
