Why Did My Mortgage Payment Go Up? Escrow Shortages, Explained

Trust me, you're not alone. One of the most common messages I get is some version of: "My mortgage payment went up and I didn't do anything!"

Nine times out of ten, the answer is in one letter you probably skimmed: your annual escrow analysis. I spent more than a decade in mortgage loan servicing, and I've read thousands of these. Let me walk you through what's going on and what you can do about it.

First, what is escrow?

If you have an escrow account, your monthly mortgage payment isn't just your loan. It's usually three things:

• Principal and interest (the loan itself, which normally doesn't change on a fixed-rate mortgage)
• Property taxes
• Homeowners insurance (plus flood or mortgage insurance, if you have them)

Your servicer collects a slice of your taxes and insurance every month, holds it in your escrow account, and pays those bills for you when they're due.

So why did my payment go up?

Once a year, your servicer has to look back at what it actually paid out and look ahead at what it expects to pay next year. That's the escrow analysis. If your property taxes or insurance went up, two things happen:

1. The new monthly amount goes up to cover the higher bills going forward.
2. A shortage shows up if the account didn't collect enough last year, and that gets added on top.

That's why the jump can feel so big. You're paying for the higher bills and catching up on what was missed.

The biggest escrow shortage I ever saw

When I took over escrow at a credit union, some accounts hadn't been reviewed in three to five years. One of them was short more than $60,000. The home had been renovated, reassessed at over $1.4 million, and lost a tax exemption, and nobody caught it. Fixing it would have raised the payment by more than $5,000 a month.

The homeowner, an attorney, refused to pay and threatened to sue. It went all the way up to the CEO, and the credit union absorbed the entire $60,000. Later I found out he knew his taxes had gone up the whole time. He was just waiting for us to notice.

That is not a normal outcome. If your tax and insurance bills really went up, the shortage is usually real money you owe, even if your servicer was slow to catch it. Most of us don't have an attorney's leverage, so the smart move is to keep a shortage small before it ever gets big.

Your rights when you have a shortage

Federal escrow rules (RESPA, Regulation X) give you some real protection:

• Big shortage, no lump sum. If the shortage is equal to or more than one month's escrow payment, your servicer can't demand it all at once. It has to let you spread it over at least 12 months.
• Small shortage, options. If it's less than one month's escrow payment, the servicer can leave it alone, ask you to pay it within 30 days, or spread it over at least 12 months.
• Limited cushion. Your servicer can keep a cushion in the account, but it can't be more than one-sixth of your yearly escrow bills (about two months' worth).
• Surplus comes back. If the analysis shows a surplus of $50 or more and you're current on your payments, it has to be refunded to you within 30 days.

Want to pay a shortage off in one shot so your monthly payment doesn't jump as much? You can usually do that too. Just ask your servicer how to send it so it's applied to escrow, not principal.

Three things you can do right now

1. Check the numbers. Pull your actual tax bill and insurance declarations page and compare them to the amounts on your escrow analysis. Mistakes happen, especially after an insurance switch or a tax reassessment.
2. Don't wait for the letter. If your tax bill or insurance premium jumps mid-year, call your servicer and ask for an updated escrow analysis. Catching it early keeps the shortage small.
3. Shop your insurance. Insurance is the part of escrow you actually control. If you switch, send your servicer the new policy right away so they don't pay the old company.