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When you purchased your home, your monthly mortgage payment was likely a big consideration. You set a budget and shopped around for lenders to find a house and rate you could afford.
But now — surprise! Your payment has changed, even though your rate is the same. What happened?
The answer likely lies in your annual escrow analysis. Once a year, your mortgage servicer reviews your escrow account to ensure that there’s enough money to cover your taxes and insurance premiums. If this number changes, so will the amount you’re required to pay.
While it can be frustrating to be told to pay more, these numbers aren’t up to your mortgage servicer. It’s also possible for your taxes and insurance costs to decrease. If that happens, the amount that you’ll be required to pay each month will be less.
How does escrow work?
Typically, your monthly mortgage payment is four separate costs bundled into one, including your:
- Principal balance
- Interest
- Property taxes
- Insurance premium
The insurance premium includes your homeowners insurance and, if required, your mortgage insurance (either PMI or MIP). Your mortgage servicer applies your payments to your balance and interest, while holding a portion of each payment in an escrow account for your property taxes and insurance premiums, paying those bills on your behalf when they come due.
You’re required to keep a minimum balance in your escrow account to cover the entire bill, which varies depending on where you live.
Each year, your servicer reviews the account. If there’s too much money, you may get a refund check. If there’s not enough money, your monthly payment may increase.
How to read your escrow analysis
Your servicer is required to send you an account statement within 30 days of completing their analysis. This statement will include:
- Your current monthly mortgage payment, including the amount that goes towards the escrow account.
- The monthly payments you made in the past year and the portion that went into your escrow account.
- The total amount paid into the escrow account in the past year.
- The balance on the account at the end of the analyzed period, including how much was paid toward both taxes and insurance.
- Details on what the servicer will do with a surplus balance or how they’ll require a shortfall to be covered.
- An outline of the difference between the previous required payment and the new payment.
Ways to lower your monthly mortgage payment
If your monthly mortgage payment is now higher than you’re comfortable with, you have a few options for lowering it.
Shop around for a new insurer
If your mortgage payment rose because of your homeowners insurance premium, it may be worth shopping around for a new insurer. You could find a better rate, especially if you made upgrades that improved the safety of the home. However, you may have to pay a penalty if you cancel your policy before it expires.
Refinance or modify your mortgage
If you can refinance your mortgage to a lower interest rate, then you can lower your overall mortgage payment — potentially offsetting a larger escrow account balance requirement. You can also use refinancing or modification as a means of extending your loan term. This would give you more time to pay off your mortgage, lowering the amount you’re required to pay each month. However, you’ll end up paying more interest overall.
Get rid of mortgage insurance
If you put down less than 20% when you purchased your home with a conventional mortgage but now have at least 20% equity, you can discuss dropping PMI with your servicer.
If you used an FHA loan to purchase your home and put down at least 10%, you’ll need to pay mortgage insurance premiums for 11 years, and then the insurance will drop automatically. If you put down less than 10%, you’ll have to refinance into a non-FHA loan to remove the MIP.
Remember, your equity goes beyond the mortgage payments you’ve made — if the house is now worth more than when you purchased it because of factors like appreciation or renovations to the home, that difference is included in your equity.
Who to contact for more information
If you have further questions about your escrow account or if you think that there’s an error in your analysis, contact your mortgage servicer.
If your escrow payment increased, the next step depends on what caused it.
Your property taxes went up:
Check your state’s treasury or revenue department website to see if you qualify for property tax relief programs. For example, Nebraska residents may receive property tax relief if they’re over 65, a veteran or physically or mentally disabled.
Your homeowners insurance went up:
Contact your insurance provider and explore options for lowering your premium. This may involve increasing your deductible, bundling your home and auto insurance, or applying for discounts.
» MORE: How to calculate property taxes
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