For many homeowners, an escrow account is an important part of the mortgage process. Each month, part of your mortgage payment is set aside to cover expenses like property taxes and homeowner’s insurance. This helps make sure those bills are paid on time without you needing to set aside large sums when they come due.
If you’ve ever noticed your total mortgage payment changing from year to year, it’s typically not because your loan or interest rate has changed. Instead, it is usually tied to your escrow account. Understanding why escrow payments change and how they are managed, can help you plan ahead and feel more confident about potential changes to your monthly payment.
An escrow account is a separate account managed by your mortgage lender. Each month, your lender collects money from you along with your principal and interest payment. Escrow funds are used to pay:
Because these expenses can change from year to year, the amount collected for escrow also needs to change over time.
Escrow accounts are designed to adjust as the actual costs of taxes and insurance adjust. Here are the most common reasons your escrow portion might increase or decrease:
Local governments reassess property values or adjust tax rates regularly. Even small changes in your assessed value or rate can increase the total taxes owed.
Homeowner’s insurance is subject to annual renewal and can increase due to higher rebuilding costs, changes in coverage, or market conditions in the insurance industry.
In some areas, certain municipal fees (like sewer, drainage, or fire district assessments) are escrowed. Any changes to these charges affect your account.
It’s important to note that these are expenses tied to your home and community, not to the terms of your mortgage loan.
Each year, your lender performs an escrow analysis. This review compares how much was collected with how much was paid out. The analysis looks for three possibilities:
The analysis ensures the account stays accurate, and that there is always enough set aside to pay bills when they are due. It is important to note, that lenders cannot retain more than two months worth of bills in the escrow account. Funds above that amount would be subject to one of the options listed above.
While every homeowner’s situation is unique, here are some things you can generally expect when it comes to escrow adjustments:
It is common for escrow amounts to change slightly each year because property taxes and insurance premiums rarely stay the same.
If your escrow analysis shows a shortage, you may have choices. Some lenders allow the shortage to be spread across 12 months, while others let you pay it as a lump sum.
If your account collected more than required for escrow bills, federal law requires lenders to return surpluses of $50 or more, unless you ask to apply the balance to your account.
Although you cannot control local tax rates or insurance premiums, you can prepare for changes to your escrow payment. Here are some practical steps:
Build a little room into your budget to absorb potential increases in property taxes or insurance.
If your community announces changes in property assessments or tax rates, you can anticipate how that may affect escrow.
Talk to your insurance provider to make sure your coverage and cost are right for your needs. Shopping around occasionally may help you manage premiums.
Escrow accounts are designed to make homeownership easier by spreading out the cost of taxes and insurance. While it can feel surprising when the escrow portion of your mortgage changes, those adjustments reflect real changes in the costs of owning and protecting your home.
If you ever have questions about your escrow account, your annual analysis, or how adjustments are calculated, our Tompkins Community Bank team is here to help.