Most borrowers pick a fixed-rate mortgage which offers the comfort and safety of knowing how much of your budget you will have to allocate monthly to pay your mortgage. However, once in a while, you may receive a notice from your lender to inform you that your escrow payment, and hence your monthly payment, has gone up.
Escrow payment is an account set up (and often required) by your lender to cover charges related to homeownership, such as property taxes, hazard insurance, and mortgage insurance. The cost of these items is tacked up to your monthly payments. It allows you (and your lender) not to worry about the fee for these items being paid on time. However, if anything changes, your escrow payment could go up, or, more rarely, down.
Here are the usual culprits if your escrow payment goes up.
1. Your property taxes increased
An increase in your escrow payment is usually due to a rise of your tax property. On a regular basis (usually every year), the town assessor reassesses the value of your house.
If you have made significant improvements in the past year, or if you bought a newly built home, you can expect your escrow payment to go up since the new assessment will include these items. Even if no improvements have been made, you could still see an increase in your tax assessment. In an improving market, the value of your house (and your property tax payments) may increase.
A city can also increase its property tax rate overall, which would lead to an increase in your property tax rate and escrow payment.
2. Your home insurance fee was raised
Another reason why your escrow payment may have increased could be that your home insurance fee has been raised. There could be several reasons for this augmentation.
First of all, if you recently filed a claim, your insurance score may have gone down. Even if you did not file a claim yourself, your insurance could raise your premium if a significant number of your neighbors have done so, as it raises concerns on the safety of your neighborhood for example.
If construction costs have increased in your area, it might also affect your monthly home insurance premiums which are calculated based on your home rebuild cost (also known as dwelling coverage). It could be due to a shortage of labor, or an increase in reconstruction after a natural disaster for example.
Finally, your insurance may increase its rates across the board.
3. What to do if your escrow payment goes up?
Unfortunately, in many cases, you have to pay these costs as they are part of the homeownership burden.
The best way to prepare for an increase in your escrow payment and budget accordingly is to stay up to date with changes in your property tax assessment or insurance rates ahead of time.
Finally, if you are concerned that these changes have no reason to be, you can appeal your tax assessment and check if you may qualify for an abatement.
Your insurance may also be willing to discuss with you options and propose solutions to help decrease your payments, like for example raising your deductible or improving your house to protect it against potential disasters for example.