The Question That Lands in Homeowners' Inboxes Every Year

Why did my fixed rate mortgage payment just go up? I thought it was fixed. It is one of the most common questions homeowners ask and the answer comes down to one word. Escrow.

What an Escrow Account Actually Is

Your fixed rate mortgage payment more than likely includes an escrow account alongside the principal and interest portion. An escrow account is essentially a savings account attached to your overall housing payment that collects funds throughout the year to pay your homeowners insurance and property taxes when those bills come due.

The principal and interest portion of your payment is truly fixed. That number will not change for the life of the loan. But the escrow portion is not fixed because the bills it is designed to pay are not fixed.

Why the Escrow Portion Keeps Changing

Property taxes and homeowners insurance tend to go up year over year not down. When your mortgage servicer reanalyzes your escrow account each year they compare your current insurance cost to what it was the year before and your current property tax bill to what it was the year before.

If either of those costs has increased the escrow account needs to collect more each month to make sure the bills can be paid when they come due. If the account fell short during the prior year because costs came in higher than projected the servicer also needs to collect additional funds to make up for any shortage that already exists in the account.

As Caleb Patton explains both of those adjustments can happen simultaneously which is why the increase in your total monthly payment sometimes feels larger than the underlying cost changes would suggest. The higher ongoing collection and the catch-up for the prior year's shortfall hit at the same time.

What You Can Do About It

Two actions are worth taking every year to stay ahead of escrow-driven payment increases.

Check your property taxes annually. If your county's assessed value appears higher than what your home would realistically sell for in the current market you have the right to appeal that assessment. A successful appeal reduces your annual tax bill and the monthly escrow collection required to fund it.

Re-shop your homeowners insurance at renewal rather than automatically renewing with the same carrier. The same coverage is frequently available at a lower premium from a competing insurer. Those savings reduce your escrow requirement directly and help keep everything in budget as costs continue to rise.

Caleb Patton works with buyers and homeowners to understand every component of the monthly housing payment and how to manage it effectively over time. Reach out to Caleb Patton with any questions about your specific situation.

Sources

ConsumerFinancialProtectionBureau.gov
Investopedia.com
MortgageNewsDaily.com
InsuranceInformationInstitute.org
BankRate.com