Escrow shortages
Why Did My Mortgage Payment Go Up? Escrow Shortages Explained
If your mortgage payment went up even though you have a fixed rate, the change is almost always in escrow. Rising property taxes or homeowners insurance can leave your escrow account short, and the servicer raises your payment to catch up.
Quick Take
- Escrow follows your property tax and insurance bills, so it can change even on a fixed-rate loan.
- A shortage raises the payment twice: a higher base escrow and a temporary repayment installment.
- You can usually spread a shortage over 12 months or pay it in full to drop the installment.
- Checking your assessment and shopping insurance are the main ways to shrink future increases.
Your rate is fixed, but escrow is not
On most mortgages the monthly payment has two layers. Principal and interest are fixed for the life of a fixed-rate loan. Escrow, the part that pays property taxes and homeowners insurance, is recalculated every year to match the actual bills.
So when a tax bill or insurance premium rises, the escrow part of your payment rises with it, even though nothing about your loan changed. The yearly escrow analysis letter is where that change shows up.
Where a shortage comes from
Your escrow payment for the past year was set from the bills the servicer expected a year ago. If the actual tax bill or insurance renewal came in higher, the deposits you made were not enough to cover it, and the account balance ended up lower than planned.
The servicer is also allowed to keep a cushion of up to two months of escrow payments. When your bills grow, the cushion target grows too. The gap between the projected low balance and that target is the shortage on your statement.
Why the increase feels bigger than the bill increase
A shortage usually adds two things to your payment at once: a higher base escrow that covers the new yearly bills, and a separate monthly installment to repay the shortage, typically over 12 months.
For example, if insurance rises $900 a year, base escrow rises about $75 a month. If that increase also created a $1,050 shortage, repaying it adds about $88 a month for a year. The payment jumps roughly $163 at first, then settles about $75 higher once the shortage is repaid.
Your options when you get a shortage notice
You can usually spread the shortage over 12 months, which federal rules require servicers to allow when the shortage is at least one month of escrow. You can also pay it in full to remove the extra installment; ask the servicer to confirm the recalculated payment in writing.
Check the analysis for mistakes. Compare the tax and insurance amounts on the statement with your actual bills, and make sure an insurance policy you switched was not paid twice. Errors happen, and a correction can change the shortage.
Look at the bills themselves. A property tax assessment that looks high compared with similar homes may be worth appealing during your locality's appeal window, and shopping insurance before renewal can lower next year's escrow.
Shortage, deficiency, and surplus
A shortage is a projected low balance below the allowed cushion. A deficiency is an actual negative balance, when the servicer advanced its own money to pay a bill. A surplus is the opposite: the account holds more than needed.
Under federal escrow rules, a surplus of $50 or more generally must be refunded within 30 days of the analysis if your loan is current. Smaller surpluses may be credited toward next year's escrow instead.
Run the numbers