I thought I was locked in at a fixed rate. My monthly payments were 1837.06 in 2010, but it jumped up to 2173.43 Feb 2011.
My escrow increased and I was reading something about shortfalls and the lender having to cover for me in 2010. Blah blah blah blah…can some professional Real Estate person please explain this to me.
The escrow funds are used to pay your school/property taxes, and sometimes your homeowner’s insurance. Most likely one of those has gone up.
Get a copy of your property tax bill and see if the increase matches the increase in your mortgage payments.
FWIW, our insurance went up a shitload, ~300/year. Never filed a claim or even inquired about filing one. I blame all the tornadoes.
Almost every year my mortgage payment goes up. The mortgage part stays the same but the escrow (taxes and insurance) goes up… usually. When housing prices fell my tax assessment went down and I actually got a small refund for the escrow over payment.
When your taxes go up, the mortgage company has to collect more from you so they can pay those taxes. In fact, they may have to collect additional funds to make up for the shortfall from the previous year.
When you have had a mortgage for 20 years like I have, the tax payment can get as high or higher than the mortgage payment.
IIRC from long ago when I had a mortgage, any time escrow changes the lender is required to send you a notice long in advance explaining why. Typically a fixed rate mortgage can only increase because the lender believes your property taxes + insurance are going to increase. However, you’re talking about a huge increase - $4,036 per year? Maybe your school district decided to by gold-plated iPads for all the students.
This. You should keep a close eye on this.
But the OP’s payment went up by 250.00 per month.
WTF.
These types of posts are what makes buying a home seem so daunting to me.
I figure i’m paying X amount for rent and then look at a mortgage calculator and assume that same payment would get me X amount for a mortgage.
It can just ‘go up’? Christ.
One thng to keep in mind here - it went up “double” - according to the OP, the lender had to cover for extra costs not already covered for in escrow + account for the increased cost over the next 12 payments. So, hes paying, potentially, in 1 year what should have been spread over 2.
Assuming its not a mistake - the OP should carefully review all the records here.
I see an increase in my Escrow payments of an extra $152.16. Plus two new categories under “Escrow Payment”. One is “Shortage Payment” $105.33. The other is “Reserve Requirement” $78.88, I didn’t pay them before. Thats a total increase of $336.37. What are Shortage Payment and Reserve Payment??? Is this something new the banks found a loop hole in the system so that they can increase mortgage payments on a fixed rate???
Your actual mortgage payment has NOT increased.
Your monthly payment is actually a combination of the mortgage and the escrow portion (for tax and insurance). Since it’s combined, you don’t have to write a separate checks to the city/county for property taxes or the insurance company. The mortgage part (that goes to the bank) is still the same. But the tax/insurance part has increased. The bank doesn’t keep any of that money.
Your property tax and/or your homeowners insurance went up in the last year. So, the escrow part should have gone up last year. But it didn’t. So, the increase of $152.16 is for the increased amount. The $105.33 shortage is to make up for the lack of payments last year, and the $78.88 is to give your escrow account a buffer. It’s pretty common to have a requirement that the escrow account have a reserve of 3, 6, or 12 months’ worth of tax and insurance payments. Yours almost certainly probably ran out over the course of the last year and you are replenishing it.
The $78.88 reserve portion should disappear when your escrow account finally gets that buffer back. Likewise, the $105.33 shortage should disappear after this year. You’re stuck with the $152.16 unless your taxes or insurance decrease.
A shortage payment likely indicates that your property taxes / insurance went up, and there wasn’t enough in the escrow account. They’re charging you extra to cover the shortfall, as well as raising the escrow payment to cover that amount in the future. It sounds like either your property taxes or insurance premiums went up by an unexpectedly large amount, as stated by others.
We’ve been through a housing bubble and taxes have changed more than normal. Banks try to estimate the monthly escrow amount at just a little higher than what they’ll be required to pay out. People don’t mind getting surprise small checks at the end of the year. Also, there are laws regulating the handling of the escrow account that banks must follow.
If the tax assessment on your house has changed, you should have gotten a notice from the County telling you. The change could be because taxes increased, because voters voted in a new assessment, or because the value of your house was reassessed and determined to be higher. Likewise, your insurance company should have notified you of any increases in cost. You should have known that an increase was coming.
The escrow account is the banks covering their backsides for things that a homeowner would have to be paying anyway. If taxes and insurance go up, then taxes and insurance go up.
This will affect you whether you keep track of it or not. It will also affect you whether you own a house or not. One of the reasons that I own a house is that I got a notice from my landlord saying that the rent on my studio apartment was going to be raised $225 when the lease renewed.
Property tax is a function of the tax rate and the market value of your property.
To protect homeowners, there are usually restrictions that prevent property tax from climbing very rapidly due to skyrocketing property values, although it can jump once pretty good when you buy the house (if you bought it for a lot more than the seller originally bought it for). Example: the property tax on our house the year before we bought it was about $6000. After we bought it, it was reassessed at the new selling price (quite a lot more than our seller paid for it), and our property tax jumped to about $7650, an extra $135 per month. This is expected, and you can budget for it when you’re deciding whether you can afford a particular house; all you need to know is your city’s millage rate and how much you’re going to buy the property for, and you can figure out what your property tax will be.
Your property tax can increase arbitrarily fast if your city passes giant new millages for things like parks or roads or schools. If you’re a homeowner, you’re likely to be quite motivated to pay attention to these sorts of things on the ballot every year.
Insurance can vary from year to year, but of course if your current insurer is putting the screws to you, you’re free to shop around for a better deal at any time. On a $250K house, we’re paying about $1100 in insurance every year; if it goes up by a whopping 50%, that’s only $45 extra per month. Not a huge burden, considering our monthly payment (mortgage+insurance+property tax) is about $1500.
Once a year your mortgage lender estimates how much should be getting deposited into your escrow account every month to cover the semi-annual property tax payments (and annual insurance premium, if that’s coming out of escrow). If they’re way off, then the escrow account builds up either a surplus or a debt over time. If it’s a surplus, they’ll tell you to start paying less, and they’ll send you a check for the amount of surplus. If you’ve built up a debt, they’ll tell you to start paying a LOT more to pay down the debt over the next calendar year, then lower your payment a little bit to keep things on an even keel after that.
Since your lender may wait as long as a year to make a correction, the discrepancies can build up. You can avoid being caught off-guard by paying attention to the property tax statements you get from your city every year that tell you what you will be paying for taxes. Likewise with statements from your insurer.
My guess is that the OP bought his house about a year ago at a price substantially higher than his seller, and didn’t account for the fact that the property tax bill would reset (sometime within a year of purchase) due to city’s reassessment of the property value; it’s likely his monthly payment has gone up to keep up with the new tax rate, and also went up another increment to pay back the debt that built up in his escrow account over the past year.
I’ll be curious to hear what actually happened.
Wow thats a relief!!! I can understand property taxes going up. I was just confused on the Shortage and Reserve payments. Is this something new or has it been around all this time?
Oh, and I forgot to mention, you probably will see additional increases in the future because of tax rate or insurance rate increases.
You can avoid lender payment increases by simply paying your own taxes and insurance, but the lender usually makes an escrow account a condition of the loan to avoid nonpayments. Again, the lender itself doesn’t keep any of that extra money - it goes to your escrow account, where it is paid to the insurance company and government.
I didn’t have an escrow account, but the bank had to re-verify my income, ability to pay, and savings history. And they required proof from the insurance company that I had already paid for the next year’s insurance before closing and I had to grant permission for them to check that I was always paid up for the following year’s insurance.
Edit for new post: Reserve requirements have been around for a while. I’m not sure on shortages but they probably have been. Either that, or the lender or escrow account people will send a notice to make up for the shortfall. It’s not unusual to see insurance rate increases over 30 years, after all and most people probably prefer a short term monthly increase over a single large lump sum.
Pull out your HUD document from when you bought the house. You’ll see a line in your closing costs for an escrow payment reserve. That’s money that’s kept in escrow as a sort of buffer or safety net. Throughout the last year, you were underpaying your taxes, so the bank had to use that safety net to cover the shortage. You need to replenish that. That’s the “reserve” fee they mention.
That wasn’t enough, though, so they had to go negative on your escrow account. They want you to pay that back. That’s the “shortage” fee they’re charging you.
The rest is to cover the new expenses so they don’t fall short again.
And just so we’re clear, it’s not the bank that’s bending you over. It’s the city/borough/county/municipal council that did that by raising your taxes. If you’re sufficiently enraged by this, petition your neighbors to vote out those jerks and bring the taxes back down.
As much as people like to hate on banks, they didn’t do anything wrong in this case.
They’ve been around at least since the 1980’s, and I’d expect they’ve been around as long as there’s been escrow on mortgages.
I’ve had the same thing happen several times over the past few years, due to property tax increases (man, I hate Cook County).
The good news is that, if your property taxes (or homeowner’s insurance) don’t go up again, your monthly payment may go back down in a few months, once you’ve paid off the “shortage”, and refilled your “reserve”.
I think they usually only re-evaluate escrow deductions once per year. So the OP may be building up an escrow surplus for the next year, probably not just a few months.
Also, don’t forget that banks sometimes make errors. A few years back, the bank looked at my total tax bill and decided that it was my quarterly tax bill. Needless to say, my escrow withholdings went up a ton, and I had to make a phone call to get it all straightened out.