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It’s practically an annual ritual for homeowners: Around February, a letter comes in the mail detailing the results of your latest escrow analysis. If your account comes up short, you’ll have to pay up, either via a one-time payment or by spreading the sum over next year’s monthly payments.
Escrow account shortages are a poorly understood phenomenon in the US mortgage system, but they’re growing more common. The accounts hold money in reserve for property taxes and homeowners insurance that mortgage servicers — the middlemen that handle payment processing — pay on a homeowner’s behalf.
Taxes and insurance costs are rapidly rising in much of the country, resulting in many homeowners inadvertently underpaying those expenses. When those bills come due, owners can end up owing extra money if their escrow account balance isn’t high enough. What seems like a fixed mortgage payment can suddenly end up increasing, sometimes by over $100 a month.
The shortage notices — and subsequent bill increases — come as a shock to many homeowners, especially those already stretched thin by high home prices and mortgage rates near 7%.
“A lot of people see escrow as, you just forget about it,” said Lisa Araujo, a loan officer at Redmond Mortgage in Guntersville, Ala. “You’re trusting that it’s being taken care of.”
“We do need to talk about how taxes and insurance can go up as well.”
Read more: How does escrow work when buying a home?
Around 80% of mortgage holders have escrow accounts. They’re mandatory for any borrower putting down less than 20% to buy their home or using any type of non-conventional mortgage. Homeowners who are eligible to go without one are responsible for paying taxes and insurance on their own.
But while the accounts are common, they can be confusing for many homeowners. Lereta, a firm that provides tax services for loans, found in a survey last year that 28% of homeowners were somewhat aware or not aware at all that escrow changes could affect their monthly payments, and 53% of homeowners who received a payment increase were surprised by it.
When a homeowner gets an escrow shortage notice, rising property taxes are often to blame. Home values have increased rapidly since the pandemic, strengthening owners’ equity positions but also leaving them with steeper tax bills when their property values are reassessed. Some, but not all, states cap annual property tax increases, and how those caps work also varies.
“There are people who have had to give up their homes because of the appreciation they received,” said Mitchell Dunn, a Bowling Green, Ky.-based loan officer at Loan Factory.
