A mortgage payment can sometimes increase even when your interest rate has not changed. One common reason is an escrow shortage.
For homeowners, receiving an escrow analysis showing that the account does not have enough money to cover upcoming property taxes or homeowners insurance can be confusing. You may suddenly see a higher monthly payment or be given the option to make an additional payment.
Understanding what causes an escrow shortage and how it affects your mortgage payment can make these changes easier to manage.
What Is a Mortgage Escrow Account?
A mortgage escrow account is used to collect money for certain recurring homeownership expenses, most commonly property taxes and homeowners insurance.
Instead of paying these expenses separately when they are due, a portion of the estimated annual cost is generally included in your monthly mortgage payment.
Your mortgage servicer then uses the escrow funds to pay the applicable bills when they come due.
This can make budgeting easier because large annual or semiannual expenses are divided into smaller monthly amounts.
What Is an Escrow Shortage?
An escrow shortage occurs when your escrow account does not have enough money to meet the required balance for upcoming payments.
Your mortgage servicer periodically reviews the account through an escrow analysis. If the actual or expected expenses are higher than originally estimated, the account may fall short.
For example, your property taxes may increase after your home’s assessed value changes. Your homeowners insurance premium could also increase.
If the amount being collected each month is no longer enough to cover the higher expenses, an escrow shortage can develop.
What Causes an Escrow Shortage?
Several situations can lead to an escrow shortage.
Property Taxes Increase
Property taxes can change from year to year. If your tax bill increases, your mortgage servicer may need to collect more money through escrow.
Homeowners Insurance Costs Increase
An increase in your homeowners insurance premium can have a similar effect.
Because insurance is commonly paid through escrow, a higher premium means more money may need to be collected.
Initial Estimates Were Too Low
When your mortgage was first established, your servicer had to estimate future taxes and insurance costs.
If the actual bills turn out to be higher than expected, the original escrow calculation may no longer be sufficient.
Changes in Your Property Taxes or Insurance Timing
The timing of tax and insurance payments can also affect the amount that needs to be maintained in your escrow account.
Your servicer accounts for these expected expenses when completing the escrow analysis.
Why Did My Mortgage Payment Increase?
An escrow shortage can cause your monthly mortgage payment to increase for more than one reason.
First, your future escrow payment may need to increase because your property taxes or insurance costs have gone up.
Second, your servicer may collect additional money to make up for the existing shortage.
This means your new payment could include:
- Principal and interest
- Property taxes
- Homeowners insurance
- An amount to repay the escrow shortage
The principal and interest portion of your payment may remain unchanged if your mortgage has a fixed interest rate.
The increase may instead come from the escrow portion of your payment.
Do You Have to Pay an Escrow Shortage All at Once?
Not necessarily.
Depending on the circumstances and applicable servicing rules, a shortage may be handled through your future monthly payments rather than requiring you to immediately pay the entire amount.
Your escrow analysis should explain how the shortage is being addressed.
If you receive an escrow statement and are unsure why your payment changed, contact your mortgage servicer and ask them to explain the calculation.
Can You Pay the Escrow Shortage in Full?
In some situations, homeowners may have the option to pay an escrow shortage as a lump sum rather than spreading the shortage across future monthly payments.
Whether this option is available and how it affects your future payment can depend on the servicing situation.
Before making a large payment, review the escrow analysis and understand what your new monthly payment would be under each available option.
What Is an Escrow Analysis?
An escrow analysis is a review of your escrow account that compares the money expected to come into the account with the amounts expected to be paid out.
The analysis helps determine whether your current monthly escrow payment is sufficient.
It may identify:
- A shortage
- A surplus
- A change in required monthly escrow payments
- Updated property tax estimates
- Updated homeowners insurance costs
Reviewing the statement can help you understand why your mortgage payment changed.
What Should You Check on Your Escrow Statement?
If you receive an escrow analysis showing a shortage, don’t immediately assume there is an error.
Start by reviewing the information carefully.
Look for:
- Previous escrow balance
- Property tax payments
- Insurance payments
- Current monthly escrow contribution
- Projected expenses
- Required minimum balance
- Shortage amount
- New monthly payment
If something does not look correct, contact your mortgage servicer for clarification.
You can also compare the property tax and insurance amounts with your actual statements to make sure the information being used is accurate.
Can an Escrow Shortage Be Avoided?
You cannot always prevent an escrow shortage because property taxes and insurance premiums can change.
However, understanding your housing expenses can make an unexpected increase easier to manage.
Keep track of:
- Property tax changes
- Homeowners insurance renewals
- Changes to your mortgage payment
- Annual escrow statements
If you know your property taxes or insurance premiums have increased significantly, you can anticipate that your escrow payment may eventually be adjusted.
What If Your Escrow Account Has a Surplus?
An escrow account can also have more money than necessary.
This is generally referred to as an escrow surplus.
Your mortgage servicer’s annual escrow analysis will determine whether a surplus exists and how it should be handled under the applicable rules.
A surplus can occur when your actual property taxes or insurance costs are lower than previously estimated.
The important thing is to review the statement so you understand why your escrow balance changed.
Should You Be Concerned About an Escrow Shortage?
An escrow shortage does not necessarily indicate a problem with your mortgage.
In many cases, it simply means the cost of property taxes or insurance changed and the original escrow calculation no longer matched the actual expenses.
The important thing is understanding why the shortage occurred and how it affects your monthly payment.
If your payment becomes difficult to manage, contact your mortgage servicer or mortgage professional as soon as possible rather than ignoring the change.
How the Molly Dean Team Can Help
Understanding your mortgage payment involves more than looking at the principal and interest amount.
Property taxes, homeowners insurance, and escrow can all affect your total monthly housing expense.
The Molly Dean Team helps Kansas City homebuyers and homeowners understand the different components of mortgage financing and make informed decisions throughout the homeownership process. The team also provides mortgage calculators that can help borrowers evaluate estimated housing costs and different financing scenarios.
If you have questions about how escrow fits into your mortgage, discussing your specific situation with your mortgage professional can help you better understand your options.
Conclusion
A mortgage escrow shortage can cause your monthly payment to increase when your property taxes, homeowners insurance, or other escrowed expenses are higher than originally estimated.
The increase may include both additional money needed for future expenses and an amount used to address the existing shortage.
If you receive an escrow analysis, review the statement carefully and make sure you understand the reason for the shortage and how your new payment was calculated. When something is unclear, contact your mortgage servicer or mortgage professional for an explanation.
Understanding escrow can help you prepare for changes in your monthly mortgage payment and manage your overall homeownership budget more effectively.
