This week I signed into my home lender’s bank account and noticed that there was a message saying, “Payment Change Coming”. The change in my mortgage payment is due to changes in my escrow account. Before I bought my home I wasn’t quite sure what an escrow account was let alone an escrow analysis. Now that I’ve been a homeowner for a little over two years I’ve learned how these accounts work.
First, the Escrow Account is established by the bank when you first buy your home in order to pay for property taxes and insurance during the term of the loan. In some cases having an escrow account with your lender is required under the mortgage terms as they want to make sure you will pay your property taxes. My bank requires a balance equal to two months of payments.
Every year the lender will perform an Escrow Analysis to determine if you have enough funds to cover the payments to be made on your behalf. The first year I received the notice of my escrow analysis I ended up with a shortage in my escrow balance, which meant my mortgage payment went up by $10/month. My lender gives me the option of paying the difference up front or I could just pay it monthly by increasing my mortgage payments.
Your Mortgage Payments
Your mortgage payments never go up if you have a fixed loan rate but your property taxes and home insurance will change and they usually increase. Due to this your mortgage payments can fluctuate from year to year. Many people prefer not to have an escrow account for this reason. I have a friend who decided to forgo her escrow account because her husband just couldn’t take the “increase” in mortgage payments every year. To him it felt as if they kept increasing his loan.
Last year I had a surplus in my escrow account which was a nice welcome because I not only received a check for about $400 from my lender but my monthly mortgage payments were also lowered by over $80/month. Unfortunately, this year my monthly payments will go up by $85/month.
What Affects Your Escrow Account Balance
Because your escrow account is based on your property taxes and insurance any time these change your escrow will change. The amount of property taxes you pay are also linked to your home assessed value established by the city you live in. So, if your home value changes your property taxes will change. The other issue is that your escrow analysis is usually based on payments made the previous year so although your property taxes or home insurance may change it could take a year to see the effects on your account.
For example, my first year as a homeowner the city lowered the assessed value of my home. Therefore, my property taxes also went down. The effect of this took a year to show up on my escrow analysis. This is because my escrow analysis takes place in October of each year and my home value assessment takes place in January of each year.
This year my home insurance went up by $300 because I no longer had a bundled deal with State Farm so they increased my home insurance rate. I left State Farm for a better car insurance deal with Geico. Although my home insurance went up it was a good move because I’m still saving $500/year by switching my car insurance to Geico.
My home assessed value has not changed in two years so I’ve had a consistent couple of years of similar property taxes. It doesn’t surprise me that the surplus I had last year has now turned into a shortage. It appears that my escrow account is finally more accurately aligned with my taxes and insurance expenses.
If you’re a homeowner, do you have an escrow account? Do you see big fluctuations in your mortgage payments each year?
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