If your monthly mortgage payment suddenly increases, but your interest rate hasn’t changed, it’s probably because your escrow payments have gone up. There are several reasons why that might happen.
What Are Escrow Payments For?
Your housing costs include more than just your mortgage. You also have to pay for homeowners insurance and property taxes.
People who have a mortgage typically have an escrow account set up to handle all those expenses. They make monthly payments that cover principal and interest for the mortgage, plus a portion of their homeowners insurance premiums and property taxes.
Those bills are paid out of the escrow account when they come due. This arrangement ensures that insurance and tax bills are covered and lets homeowners avoid having to make lump-sum payments.
Why Might Escrow Payments Go Up?
The amount that you pay every month toward property taxes is based on your most recent tax bill. Local governments periodically reassess property values, and they sometimes modify their tax rates to meet changing needs and priorities.
If your property taxes increase and there isn’t enough money in your escrow account to cover the bill, your lender will pay the difference. Then, it will adjust the amount you pay into escrow each month to make up the underpayment and to cover your higher tax bills moving forward.
An increase in your homeowners insurance premiums can also cause your escrow payments to rise. Your rates might go up if you modify your coverage, file an expensive claim or file multiple claims in a short period of time. An insurance company can also raise rates across the board if there’s a disaster that results in a large number of expensive claims.
If your insurance premiums go up and there’s not enough money in your escrow account to pay the bill, your lender will cover the shortfall. Then you’ll have to pay more each month to make up the difference and to cover your next insurance bill.
Be Prepared for Higher Payments
If you have a fixed-rate mortgage, that doesn’t necessarily mean that your total housing costs will be the same for the life of the loan. Your escrow payments are likely to change at some point. That can put a strain on your budget if you’re not prepared for it.
You should be notified before a change in your property taxes, homeowners insurance premiums, or escrow payment goes into effect. That will give you an opportunity to adjust your monthly spending accordingly. You should also leave some room in your budget so you’ll be able to cover your payments if they go up in the future.
