Understanding Escrow Accounts
An escrow account is a separate account where a mortgage lender collects and holds funds from a homeowner to cover property taxes and homeowners insurance. These funds are collected along with the homeowner's monthly mortgage payment. The lender then uses the escrow funds to pay the property taxes and insurance premiums on behalf of the homeowner when they come due.
Factors Causing Payment Fluctuations
1. Changes in Property Taxes:
Property taxes can increase due to reassessments, changes in tax rates, or new assessments for things like local improvements. If property taxes go up, the lender will need to collect more money to cover these costs, leading to higher monthly mortgage payments.
2. Changes in Insurance Premiums:
Homeowners' insurance premiums can also change. If the cost of insurance increases, the lender will adjust the escrow amount to ensure there is enough money to pay the insurance premium when it's due.
3. Escrow Analysis:
Lenders typically conduct an escrow analysis annually. During this analysis, they review the escrow account to determine if there were any shortfalls (a deficiency) or surpluses (an excess) based on the actual property tax and insurance payments made versus what was initially estimated.
4. Adjustments Due to Escrow Shortages:
If there is a shortage in the escrow account (i.e., not enough money to cover the property taxes and insurance), the lender will require the homeowner to make up for this shortfall. This can result in an increase in the monthly mortgage payment to cover the shortage over the next year, in addition to the regular monthly escrow amount.
5. Adjustments Due to Escrow Surpluses:
If there is a surplus (i.e., more money than needed), the lender may refund the excess to the homeowner or apply it to future payments. This typically results in a decrease in the monthly payment, although lenders often prefer to adjust future payments to avoid significant underpayments.
Example Scenario
Let's say a homeowner's initial escrow estimate was based on property taxes of $2,400 annually ($200 per month) and an insurance premium of $1,200 annually ($100 per month). The lender collects $300 each month for the escrow account.
- If the property taxes increase to $2,600 annually and the insurance premium increases to $1,300 annually, the new required monthly escrow payment would be:
NET ESCROW PAYMENT = (2,600 + 1,300)/12 = 3,900/12 = $325 DOLLARS PER MONTH
- The homeowner would then see their monthly mortgage payment increase by $25 to account for the higher escrow needs.
Summary
Mortgage payments can increase due to changes in property taxes, insurance premiums, and the results of the annual escrow analysis. Understanding these factors can help homeowners better anticipate and manage potential changes in their mortgage payments.
