Escrow Shortage Explained

TLDR; The YouTube video is at the end. ⬇️

Story time for a second... because this is the time of year when my phone starts blowing up.

Like many homeowners, I received a letter in the mail this January from my mortgage company that my escrow account was short (by a pretty good amount) and therefore my monthly payment was going to be adjusted higher to account for the low funds. EEK! 😵

My monthly payment was going up.
Not what I wanted to see. 

Fortunately we had prepared ourselves for this inevitability because as a Realtor, I get to see first hand the market value increases across the Metro. Which in turn affects our property taxes. I knew it was coming, I just wasn't sure when. This happened to be our lucky year. 

Why is my escrow account low?

If you're like me, getting that letter can feel like a punch in the gut. But let me break down what's actually happening behind the scenes, so you know what to prepare for.

Every year your mortgage company estimates how much your property taxes will be based on last year's tax data. They pro-rate that estimated amount for 12 months and tack it onto your total monthly payment. 

Every time you make a payment, a portion goes into your escrow account and it slowly builds up until your taxes and insurance are due for the year. Then, when the bill comes around, the mortgage company pays them for you out of that account.

Sounds simple enough... until the numbers change.

Here's where the shortage happens. Over time, your home value goes up – which means property taxes usually go up too.

And homeowner's insurance? Yeah... that almost always creeps up every year as well. 🙃

So if your lender estimated your taxes based on last year's amount, but the new bill comes in higher than expected, there suddenly isn't enough money sitting in that escrow account to cover it. Yikes!

That difference is what we call an "escrow shortage."

Now the mortgage company has to do 2 things:

1. Collect the shortage form this year.
2. Adjust your payment to cover the higher estimated amount for next year.

It can feel like a double hit all at once.

The same thing happens with homeowners insurance, which is why I always tell my clients to shop their insurance every couple of years. Sometimes switching providers can save you quite a bit.

The good news!

But here's the good news that most people don't realize...

Even if your payment changes because of escrow, your principal and interest rate never change of the life of the loan.

Your loan itself didn't suddenly get worse. It's just that taxes and insurance finally caught up.

So if you got that letter in the mail and your payment jumped a little – you're not crazy, and your definitely not the only one.

If you have questions about it, shoot me a message and I'll help you mak sense of it. That's literally what I'm here for!