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If you are a homeowner, chances are you have a mortgage with an escrow account. As you know, these accounts hold funds for paying homeowner’s insurance and property taxes. However, you cannot manage this account directly – it’s only designed to contain funds needed each month for paying bills. You also have the option to consolidate these payments into one convenient monthly mortgage bill. This service would have to be discussed with your current lender or financial institution.
The money in these accounts comes directly from your monthly mortgage payment. However, it’s important to understand what you are paying for each month:
The main issue with escrow is trying to predict the amount of taxes you have to pay in the coming year. In fact, many homeowners have difficulties trying to secure accurate estimates. This is why they usually seek additional help from their banks or lenders. If they over- or underestimate the amount, that is when an escrow shortage appears. Another common reason for shortages is an increase in your property taxes. With the latter, your monthly payments will increase as well.
As an aside, property tax changes may also impact you at tax time; stick to one of the top online tax services to be sure your deductions are recorded properly.
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Escrow shortages are very common but do affect your mortgage payments. Still, there are ways you can avoid these problems in the future. Here are some tips for all homeowners that are dealing with escrow shortages and/or increases in their monthly payments:
You can speak to your lender about repaying the deficit in lump sum. This will avoid future monthly mortgage payment hikes while getting you back on the right track. It can also help you manage and monitor your future payments – especially when it comes to escrow analysis. As always, ask your lender for detailed monthly or quarterly reports. This, too, is a great way to stay on track and avoid future problems.
The only catch with lump sum is that it can affect your monthly expenditures. Make sure you have enough cash on hand if opting for this type of payment.
You can also speak to your loan servicer about monthly payments or refinance your mortgage to bring down the rate and make it easier to pay. Remember, interest is not charged on escrow shortage amounts. With this in mind, it might be better to drag the payments out as long as possible. These monthly installments will also leave you with enough money for other monthly expenses. For more information, it’s best to speak with your lender and choose the right plan that works for you.
There are many items that are usually included in an escrow account so that homeowners can easily organize monthly payments. Items that are normally included are hazard, flood, and mortgage insurance, property taxes, ground rents, and special assessments.
There are a few ways to avoid an escrow shortage or deficiency. First, you want to ensure that you understand the policy terms when switching homeowners insurance. The second thing you can do to avoid an escrow shortage or deficiency is to set aside money or make a special payment towards your escrow account so that you can avoid future issues.
While it is possible to reduce escrow payments, it is important to keep in mind that escrow accounts are based on insurance premiums and your property tax. You should try to shop around for homeowners insurance policies before committing to one, as many insurance companies offer discounts when policies are bundled together. U.S. military members, including veterans and disabled veterans are sometimes offered discounts depending on the insurance company. You can also look into available tax exemptions that may reduce the amount of property taxes you owe.