Why Did My Escrow Go Up?

Your monthly mortgage payment has been the same all year—until now. You just received a notice that your payment changed due to an escrow shortage. But what caused it? The answer usually comes down to changes in your property taxes or insurance costs.

Changes to your escrow account are normal and happen to many homeowners. Several factors can cause your escrow payment to increase or decrease from year to year. Understanding these factors can help you anticipate changes and avoid surprises in your mortgage payment.

How does escrow work?

When you pay your mortgage each month, that money goes toward more than just your loan. It also includes funds to pay property taxes and insurance (like homeowners, flood and mortgage insurance). Your lender sets aside a portion of your payment and deposits it into your escrow account. When those bills come due, your lender pays them directly from this account (or disperses funds to you to make the payment). 

Your escrow amount is set when you close on your home, then reviewed annually. Your lender checks your account at least once a year to ensure there’s enough to cover property tax and insurance costs. That amount can also include a cushion of 1-2 months’ worth of payments to cover unexpected increases in taxes or insurance.

Why did my escrow payment increase so much?

Your escrow payment can change for several reasons. Most of the time, it’s because the costs your escrow account covers have gone up. Here are the most common causes:

• Property tax changes: Local governments reassess property values and adjust tax rates regularly. If your home’s value increased or your local tax rates went up, your property taxes will be higher. Your lender adjusts your monthly escrow payment to make sure there’s enough money to cover the new tax amount.
• Homeowners insurance premium changes: Insurance companies adjust their rates based on inflation, storm risks and market changes. If your insurance premium goes up, your lender will adjust your monthly escrow amount to cover the increased cost. 
• Flood insurance requirements: Sometimes a property that wasn’t in a flood zone gets reclassified by FEMA as a Special Flood Hazard Area. When this happens, flood insurance becomes required. Your lender will adjust your escrow to collect one-twelfth of the annual flood insurance premium each month.

What is an escrow shortage?

An escrow shortage happens when your account doesn’t have enough money to cover your property tax and insurance costs for the upcoming year. This can happen for a few reasons. 

Your property taxes or insurance premiums might have gone up more than expected. Or, you might have had an extra tax bill or special assessment that created a gap in your account balance. Your annual escrow analysis will show you exactly how much you’re short and what your options are.

What are my options if my escrow payment increases?

If your escrow payment amount goes up, you have several ways to manage the increase. Here’s what you can do:

• Pay the shortage in full. Depending on the amount of the shortage, you can voluntarily make a one-time payment to cover your entire escrow shortage. This can keep your monthly mortgage payment lower going forward. If you have the funds available, this option is the quickest way to resolve the situation.
• Spread the cost over 12 months. You can add the shortage to your monthly payment and spread it out over the next year (sometimes even up to 60 months with certain lenders). This means a higher monthly payment, but you don’t need to come up with a large lump sum right away. Your lender will calculate the new amount.
• Review your property taxes. Take a close look at your property tax assessment. If it seems too high, you can appeal it. Your local tax assessor’s office can show you how your home’s value compares to similar homes in your area. A successful appeal could lower your property taxes and reduce your escrow payment.
• Check for property tax exemptions. Many areas offer exemptions for Veterans, Active Duty Servicemembers, seniors and people with disabilities. These exemptions can reduce your property tax bill and lower your monthly escrow payment. Check with your local tax assessor to see if you qualify.
• Shop for better insurance rates. Insurance rates for similar coverage can vary between providers. Get quotes from multiple insurance companies to compare prices. Consider bundling your homeowners insurance with auto or other policies for additional discounts.
• Talk to your lender about payment options. If you’re having trouble affording the increase, reach out to your mortgage servicer as soon as possible. They may offer payment plans or hardship options that can help. The sooner you contact them, the more options you’ll have available to manage the change.

What if my escrow account balance is too high?

Sometimes your escrow account collects more money than needed to cover your property taxes and insurance. This creates an escrow surplus. A surplus usually means your property taxes or insurance costs went down, or your lender overestimated your costs when calculating your escrow payment. When this happens, your lender will typically refund the excess amount to you or apply it to lower your future monthly payments. 

Having a surplus isn’t a problem—it just means you’ll get money back or enjoy a lower monthly payment going forward!

Frequently asked questions about escrow

Here are some of the most common questions homeowners have about escrow payments.

How does an escrow shortage affect monthly mortgage payments?

Your monthly mortgage payment will go up to cover both the shortage and your regular escrow costs if you don't address the shortage by remitting a one-time payment to your lender. 

Does refinancing reset my escrow account?

Yes. When you refinance, your old escrow account closes and a new one opens with your new loan. Your previous lender will refund any remaining balance from your old escrow account. Your new lender will collect escrow funds at closing to start your new account.

How long does it take to get an escrow refund?

If you have an escrow surplus, your lender typically sends your refund within 30 days of completing your annual escrow analysis. The refund usually comes as a check mailed to your home address on file.

Can I remove escrow from my mortgage?

In some cases, yes. If you have at least 20% equity in your home and a good payment history, you may be able to remove escrow and pay your property taxes and insurance directly. However, in some instances, you won’t be able to remove it. For instance, certain regulations prevent the removal of flood escrow from your mortgage.

Contact your lender to see if you qualify and understand the requirements.

Take control of your escrow account

Changes to your escrow account are common, and you have more control than you might think. Navy Federal Credit Union offers resources to help homebuyers and homeowners understand their mortgages and make informed decisions. Explore our homeowners resources to learn more about how your escrow account works. You can also download our Understanding Your Escrow Analysis for a detailed breakdown of your escrow statement.

Keeping an eye on your credit can also help you stay prepared for future decisions like refinancing or shopping for better insurance rates. Use our Credit Confidence Dashboard to monitor your credit score and track your financial health. And, don’t forget that our mortgage specialists are here to answer your questions anytime, whether it's understanding your annual escrow account statement, keeping track of due dates or exploring your options.