Receiving notification that your mortgage payments are increasing due to an escrow shortfall can be disheartening, especially if you live on a tight budget. Your lender uses your escrow account to pay your property tax and insurance. If there is not enough money in the account when these bills are due, your lender pays them and sends you notice of the escrow shortfall.
Your lender makes an educated guess when deciding how much you must put into your escrow account, based on the most recent tax or insurance payment. If your property tax is assessed annually, your lender divides the amount of the property's most recent tax assessment by 12 and adds that amount to your mortgage payment. For example, if the most recent tax bill was $1,200, $100 from each of your mortgage payments goes into the escrow account. If the next tax bill is $2,400, you have a $1,200 escrow shortfall.
When your lender pays liabilities from your account, it sends you notification of the payments and any account shortfalls or overages. This notification typically gives you the choice of paying the shortfall in a one-time payment or paying extra with your monthly mortgage payment. The letter from your lender tells you how much the shortage is and how much your monthly payment will increase if you do not make a lump-sum payment. If you accept the increase, you do not have to do anything other than make the increased payments. Otherwise, send your lender a check for the shortfall.
Typically, payments increase even if you pay the shortage in a lump-sum payment. Because you fund your escrow account in advance, lenders adjust your payment to reflect the expected amount due for the following year. Property taxes and homeowners insurance rarely decrease, and lenders increase your escrow payments accordingly to prevent a shortfall. For example, if your insurance premium caused a $120 escrow shortfall, and you made a lump-sum payment, your lender might increase your payment by $10 a month to prevent a shortfall the following year. If you do not pay the shortage in one payment, you might expect your payment to increase by about $20 per month to cover last year's shortfall and prevent another shortfall in the coming year.
If your property tax or insurance substantially increase in a year, call your tax assessor or insurance agent to find out why. Although it's not likely, it's possible that a miscalculation led to an error that increased your payment. If you expect that your escrow account will have a shortfall, your lender might allow you to make voluntary payments to your escrow account.
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