Shopping for mortgages can take just as much time as shopping for a home for sale in Boston, MA. But when you finally decided on a fixed-rate mortgage, you most likely thought you were committing to a set payment for the life of the loan. Unfortunately, even if you intentionally steer clear of adjustable-rate mortgages and try to stay true to the monthly mortgage payment your budget allows, you could still be in for a price hike. Your escrow account could be the culprit — read on to find out why.
The ins and outs of escrow accounts
If you borrowed more than 80% of the value of your home, many lenders will require you to establish an escrow account. On top of your monthly mortgage payment, the lender will collect an estimated monthly amount to cover your property taxes, homeowners’ insurance, private mortgage insurance, and homeowners’ association dues (if applicable) for the year. The funds will be held in the escrow account until the bills become due.
For the homeowner who has trouble saving throughout the year for these large bills, escrow accounts can be a huge help. However, because they break down these expenses and add them to your monthly mortgage payment, what’s going on with your escrow account behind the scenes can be the reason your monthly payment increases.
Reason #1: Property taxes
Property taxes, especially in expensive areas, can place a significant cost burden on homeowners — and they can fluctuate wildly due to a variety of factors. Home improvements, rising property values, and government tax changes can all lead to an increased assessment.
When this increase occurs, lenders must begin collecting a larger monthly amount in the escrow account to cover the estimated cost. Since the additional money being funneled into this account is collected in one lump-sum amount with the mortgage payment, the homeowner’s total monthly cost will rise as a result. Rising property taxes can be disputed by filing an appeal for a lower assessment amount, but there are no guarantees the ruling will land in the homeowner’s favor.
Reason #2: Homeowners insurance
In addition to setting up an escrow account, financing a mortgage means homeowners insurance will be a requirement. Making improvements such as finishing a basement, building on additional square footage, or upgrading existing elements within the home to increase its overall value will also cause a rise in homeowners insurance costs. Just like the jump in property taxes, this increase will show up in the amount collected for the escrow account. Make sure to shop around for the best rate, and factor in this increased cost when you budget for any large renovation/remodel projects.
Reason #3: Lender error
While it’s usually unintentional and the result of simple human error, sometimes lenders miscalculate the monthly property tax and insurance escrow payments needed to cover the annual total. Unfortunately, it’s the homeowner who has to shoulder the expense of these miscalculated payments, which sometimes result in a steep increase in monthly costs. After all, property taxes and insurance costs must be paid in total — regardless of what the homeowner believed the cost to be. To avoid this rude awakening and an increase that could potentially make your home unaffordable, make sure all estimated costs have been thoroughly checked and budget in a cushion to your anticipated monthly mortgage payment. This will ensure that any increase will be seen merely as a hiccup and not a reason to go into full-on panic mode.