I have a fixed rate loan with payments around 1500 a month. I just got information from my bank that my escrow account is short, and to make up for the difference I’m going to have to pay an extra 60 dollars a month! What in the world is going on here? How can my escrow account be short, and why are my payments shooting up almost 6 percent?
I would appreciate if anyone could shed some light on this for me.
Probably your tax bill came in to the mortgage company and the escrow was insufficient to cover it. Therefore, to rectify the shortage they are increasing the amount going into the escrow account.
Could be several things. Have your property tax rates changed? What about homeowners insurance?
Do you pay your home owners insurance with your mortgage? The premiums could have been raised, or, as was mentioned, taxes.
Not to nitpick, but more like 4%. Some good reasons suggested above, and I’m sure your bank will give you the reason if you ask.
The letter you received should have a breakdown of what they paid out over the past year. It will show where the short fall was. Also, they anticipate how much your taxes/insurance may go up over the next year.
Our taxes increase by 1% every quarter and our insurance goes up every two or three years.
To add to what others have said, most mortgage companies hold your property taxes and insurance payments in an escrow account. However they can only try and estimate what these payments will be next year.
So, if your insurance went up by, say, $600 this year, then you are hit with a double whammy by having to make up for the $600 shortfall in your payments this year, PLUS you have to build up an extra $600 for next year’s payment. Your total payments would go up by $100 per month, and you think the bank is trying to screw you.
Every loan I’ve had, they sent a statement at the end of the year, with your previous escrow balances, payments, shortages, overages, and estimated new payments…
Mine went up because of an escrow shortfall caused by a homeowners insurance change. I was given the option to pay the difference in full right away or just roll it over into the monthly payments. There was no cost savings either way. I rolled it over.
Putting it another way, the money you pay every month goes to pay these four things:
Principal
Interest
Taxes
Insurance
On the day you signed the mortgage, the Principal and Interest you pay every month is “fixed”. The taxes and insurance can vary wildly.
Long and short of it is a fixed rate mortage locks in the Principal and Interest payments you pay each month on your home for the duration of the loan. Escrow is paid in addition to this and tacked onto your mortgage payment. It pays for your property taxes and/or homeowner’s insurance each year. These things are not “fixed” and both are likely to increase over time resulting in an increased escrow amount you owe each year.
Why can’t you just pay the property taxes and insurance directly?
IIRC it’s because the mortgage company, being the “owner” of your house, has an interest in you having it insured and paying proper taxes. So it’s a stipulation of many mortgage loans that you pay them and they pay the taxes and insurance, so they can keep an eye on you.
Mortgage lenders like to have escrow or impound accounts to protect their collateral by making sure that you have basic insurance and don’t default on your taxes. Lenders will often require them, or make you jump through a lot of hoops not to have one. There is a federal statute limiting how much a lender may require to be held in an escrow account (RESPA), but many laws concerning them differ from state to state. Some states, CA for instance, require lenders to pay interest on the funds held in escrow. The result of that is that you get a 1099-INT every year from your mortgage lender with a trivial little dab of interest income listed on it.
Oddly enough, escrow accounts were often NOT attached to the sort of loans which caused the subprime debacle. When the lender intends to write an extremely bad loan, package it in a mortgage backed security, and stick someone else with the default, they don’t really care about protecting their collateral. Not attaching the escrow allowed them to present a smaller payment to an unknowledgeable buyer who would forget to factor in property taxes and insurance into their costs.
I have paid mine directly on the two mortgages I have had since moving to the US. Maybe what you can do varies by state and by mortgage company. And possibly by the amount of equity you have versus mortgage - mine was about a 50% mortgage.
I think state law is the main issue. I paid well over 50% down, and wound up with an escrow account. To be honest, I didn’t make an issue out of it, since I don’t consider it that big a deal, so maybe I could have avoided it. There’s some measure of convenience in not having to make separate payments to the government and your insurance company. And at least this state makes them pay interest on it, not that it’s anything but symbolic at current rates.
When I had bought my first house in 1986 I was required to pay into an escrow account to cover property taxes and homeowner’s insurance. Years later when I refinanced I was given the option of having an escrow account or just paying the insurance and property tax myself, so I set up my own private “escrow account” into which I put the same amount I had been paying to the mortgage company, and kept the interest on that account for myself.
When I recently bought a townhouse I was once again required to pay into an escrow account. However, the broker said that in a few months I should talk to the bank about making arrangements to drop the escrow account payments. Since the mortgage is only 30% of the total purchase price, the bank would be willing to do this then, but trying to get the escrow requirement waived at the closing would have required paying a fee.
That must differ from bank to bank or state to state. For me…if my tax bill last year was $4000, my escrow will accrue $4000 over the course of this year. At the end of the year they send a check to me, made out to the city for $4000. If my property tax is higher then that, I cough it up, out of pocket, on the spot. Then, next year they’ll adjust the escrow to the new amount (I think, I mean I know I have to come up with the extra for this year, I’m not sure how or when they recalculate the new amount).