A portion of your monthly mortgage payment goes into an escrow account from which your lender pays your property tax and homeowners insurance. Sometimes, tax and insurance bills are higher than expected, in which case the escrow account could go into the negative. These bills will get paid but you should brace yourself for a hike in your mortgage payment.
Your property taxes are tied to the value of your home. Once a year -- but maybe less often -- a certified appraiser calculates your property's market value and your taxes may increase if your home rises in value. Likewise, homeowners insurance policies are renewed once a year. Insurance costs tend to rise over time and your renewal rate may increase more rapidly if you file a a number of insurance claims. Lenders calculate the total cost of your taxes and insurance once a year and at this time your overall mortgage payment may increase or decrease. Your escrow goes into the negative if your taxes or insurance rise after your lender has determined your new monthly payment amount.
Your lender will let you know if your escrow account goes into the negative. You may have the option of making a one-time lump-sum payment to bring the balance back into the positive. If you can't afford to do so, your account will remain in the negative until your lender balances the account. At this time, your lender will revise your monthly payment amount so that you pay enough to cover your mortgage and escrow for the coming year as well as the shortfall from the prior year.
Escrow shortages can create headaches for lenders and borrowers. Some lenders avoid this problem by increasing your mortgage payment so that your escrow account contains more funds than you need. However, federal laws limit excess deposits. Your escrow account can't contain an overage that exceeds 1/6 of your anticipated annual escrow costs. Therefore, your account only goes into the negative if your escrow costs increase by more than about 16 percent in a single year.
You are required to have an escrow account if your loan is insured by the Federal Housing Administration. Even on a non-FHA loan your lender may require you to escrow to ensure that your taxes and insurance are paid on time. However, some lenders allow you to self escrow, in which case you are responsible for paying these costs yourself. Being in control has its pros and cons. You can set aside a little money each month to cover these costs and even earn some interest on the money by holding it in a savings account, a CD or some other interest-bearing account. On the other hand, if your tax and insurance payments skyrocket then you have find a way to cover the cost because you can't spread it out over the course of the year.
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