Homeowners

Why Did Your Mortgage Payment Change? It Could Be Your Escrow Account

Homeowners can be caught off guard if their monthly mortgage payments suddenly change.

Sometimes, it’s welcome news to learn that your housing bills are going down. But other times, unhappy homeowners are left facing higher mortgage payments.

Many homeowners will experience fluctuating payment amounts over the life of their mortgages. In many cases, these shifts are due to increases in homeowner’s insurance rates or property taxes that are typically paid for out of the homeowner’s escrow account.

“Because taxes and insurance premiums change from year to year, each year the lender recalculates the amount required to be paid into the escrow account,” said Rusty Adams, a research attorney at the Texas Real Estate Research Center at Texas A&M University.

When a homeowner has an escrow account with their mortgage lender, they make monthly payments to the account to pay for these homeowner's costs. Typically, the amount they borrowed to purchase the home and the interest they are paying on the mortgage is not included.

When these costs shift due to increases in local taxes and insurance rates, the lender may require a higher payment to cover the difference. Sometimes, though, payments will go down thanks to the elimination of private mortgage insurance or property tax exemptions.

You may not even realize the significance of these changes until you receive your annual escrow analysis.

Why your escrow payments change

If property taxes or your homeowner’s insurance rate increases, that will cause your monthly payments to go up for the next year.

“The lender calculates how much will be required to pay the insurance and taxes on the property, usually on an annual basis,” said Adams. “That number is divided into twelve equal amounts, and that amount is then added to the monthly payment.”

Insurance carriers charge premiums to cover projected repairs or when natural disaster risks rise. You may even need to carry multiple types of insurance coverage depending on where you live.

For instance, flood insurance may be required by your lender in some areas, while earthquake coverage can be required in others.

Meanwhile, property taxes can rise when property values go up. This can be due to those improvements you made to your home or because home prices rose in your community.  

Your payments can also increase to cover a shortage in your account from one year to the next. Your lender calculates your insurance and property taxes based on their expectations of what it will be.

If there is a shortage in your escrow account, you can often choose whether to pay off the difference as a lump sum or have it divided into 12 installments that are added to your monthly mortgage payments.

Another factor that affects your escrow payments is your mortgage insurance.

Whether you pay private mortgage insurance (PMI) for a Conventional loan or mortgage insurance premiums (MIP) for a Federal Housing Administration (FHA) mortgage will depend on what type of loan you have and the terms of your loan.

How you can lower your escrow payments

There are things you can do to lower your escrow payments.

Understanding how your mortgage insurance works, knowing your tax exemptions, and comparing homeowner’s insurance policies are all ways you may be able to affect your escrow payments, according to Roger Stotts, chief servicing officer at New American Funding.

For instance, PMI can be removed from your monthly payments once you get your loan-to-value ratio down to 80%. In other words, when you have reached 20% equity in your home.

So, paying more toward your principal balance may get rid of PMI faster, which would lower your monthly payments.

“Mortgage insurance is recalculated every year based upon principal balance,” said Stotts. “If you have the opportunity to make extra payments to the principal, it will lower the amount you pay monthly for mortgage insurance.”

You might be able to find a lower homeowners insurance rate by comparing different insurance companies.

There also might be tax exemptions you can qualify for, such as those for veterans or based on age or disability.  

“Understand what exemptions are available to you and seek them out if you think they apply to you,” said Stotts. “That can reduce your payment.”