Escrow Woes? How to Manage Mortgage Payment Changes

If you receive notice that your monthly mortgage payment is increasing, an escrow shortage is often the culprit. Escrow accounts pay property tax and insurance bills as they come due. Shortfalls in the account trigger payment hikes to cover the gap. This guide examines what causes escrow shortages, how lenders adjust payments to compensate, and tips to avoid surprises from rising mortgage bills.

Key Takeaways on Escrow Shortages

Escrow shortfalls happen when actual costs exceed the escrow contributions collected.
Payment increases are used to fund the shortage gap over time.
Shortages frequently result from unexpected tax or insurance premium increases.
Carefully review shortage notices and negotiate affordable repayment terms if needed.
Maintaining escrow cushions and monitoring cost changes helps minimize shortfalls.

What is an Escrow Account?

An escrow account is a unique account that your mortgage lender or servicer manages to pay recurring homeownership expenses on your behalf, such as:

Property taxes
Homeowners Insurance
Mortgage insurance (if applicable)

Each month, a portion of your mortgage payment goes into escrow. The funds are disbursed to the relevant parties when tax and insurance bills come due. Escrow accounts ensure these costs are paid on time.

Why Do Mortgage Lenders Require Escrow Accounts?

Mortgage lenders require escrow accounts for most home loans to protect their investments. By managing tax and insurance payments, lenders ensure policies don't lapse to maintain property value.

Lenders worry borrowers may forget to make payments without escrow, letting insurance lapse, and taxes go unpaid, which could lead to defaults. An escrow account minimizes this risk.

How Does the Lender Calculate My Escrow Payment Amount?

When you close on the home, the lender estimates future tax and insurance costs to determine the monthly target escrow payment needed to cover upcoming bills.

They base this on your property value, location, and policy details. Your starting escrow payment is incorporated into your total monthly mortgage bill.

What Triggers an Escrow Shortage?

The leading causes of an escrow account shortage include:

An increase in property taxes or insurance premiums beyond what was initially anticipated
Unforeseen one-time expenses paid via escrow, like repairs after an insurance claim
Changing from an existing escrow waiver to establishing a new escrow account

When actual costs exceed the escrow contributions, a shortage occurs. The lender will look to adjust your payment to cover the gap.

How Do Lenders Adjust Payments to Fix a Shortage?

There are two main ways lenders modify monthly mortgage payments in response to an escrow shortage:

Spread the shortage amount over 12–60 months. This minimally increases the payment to fund the shortage over time.
Recalculate the payment: After analyzing updated tax and insurance costs, the price is raised to fully fund anticipated disbursements from escrow going forward. You'll receive a written notice explaining the new payment amount and the reason for the change. Make sure to review the shortage notices carefully.

How Much Can My Payment Increase Due to a Shortage?

There is no standard shortage payment increase amount. The adjustment depends on factors like:

The magnitude of the unexpected tax or insurance premium hike
Whether the existing escrow balance can absorb a portion of the increase
If the lender spreads the shortage over time or recalculates the entire payment,

Increases can range from a few dollars to hundreds per month, depending on your situation. Carefully review the notice from your company.

What if I Can't Afford the Higher Payment Amount?

If the new payment will stretch your budget too much, you may be able to:

Negotiate a more gradual payment increase over a longer timeframe.
Seek an interest rate reduction through loan modification to offset the hike.
Discuss waiving escrow and paying bills directly (if allowed).
Make a lump sum deposit to reduce the ongoing shortage spread amount.

Explore options with your lender to find an alternative solution that prevents mortgage default. Don’t ignore shortage notices.

How Can I Avoid Escrow Shortage Payment Increases?

Tips to minimize the chances of a shortage include:

Maintain a consistent monthly cushion equal to 2–6 months’ payments.
Proactively alert your servicer when you receive increased tax or insurance bills.
Consider paying bills directly if permitted and if you are financially disciplined.
Watch for tax assessment spikes after purchase and appeal if excessive.

Staying informed on factors impacting your escrow account helps avoid negative surprises and payment hikes.

Conclusion

While frustrating, escrow shortages are manageable if you understand why they happen and work proactively with your lender to cover deficits in a way that prevents mortgage default. Being an informed homeowner makes all the difference.

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