By Michael L Baker, Sr. Mortgage Loan Officer
I recently completed a Customer Survey with all of my past clients. It was a really cool thing to do, and a lot of clients had wonderful things to say about me and my company (warm fuzzies). However, there was an item that came up more than once, and it surrounded increases in property taxes and home owner’s insurance and how those affected my clients over all monthly mortgage payments. It’s important to understand all aspects of your mortgage so let’s dive in.
They can be the most helpful and most frustrating part of any mortgage payment. Helpful from the fact that you don’t have to worry about coming up with the $3,500 tax bill at the end of the year (who makes tax bills due around Christmas time anyway?). An escrow account also means you don’t have to come up with the $1,200 insurance bill in July right when your family is about to go on summer vacation. Escrow (or impounds) simply means that both your property taxes and your home owner’s insurance are simply added up, divided by 12 (the number of calendar months in a year) and added to your monthly mortgage payment. This helps average things out for you. It’s like getting on the average electricity bill plan (instead of paying the MUCH higher energy bills in the summer when your AC is running all day/every day, and considerably LESS in the winter months).
The Struggle is Real
But trust me when I say this, I get the frustration. I recently just went through a change in my escrow account at my house too. Our escrow payment went up $80 a month. Between our taxes and our home owner’s insurance our output for those two things went up about $480 for the year (PS, even my Insurance Agent buddy says it’s always good to shop your home owner’s insurance every 2-3 years to make sure you are getting your best deal). Our mortgage company did an escrow analysis after they made the payouts for taxes and realized the discrepancy. The mortgage company paid the usual bills and the $480 additional increase and we were left with an escrow shortage. Not only did we owe the $480 future increase ($40 a month) but we also now had to pay roughly the same amount in an escrow shortage (catching our escrow account back up). That was roughly another $40 a month for the next 12 months (escrow accounts allow you to either pay the lump sum of the shortage up front, or divide it out over the next 12 months). I always elect to pay it over the 12 months. Why not use somebody else’s money, right?
Now at the end of the 12 months shortage payback period my payment will go back down by the additional $40 a month shortage amount. However, more than likely as home prices rise, so too will my taxes and insurance over time. So I’ll need to be ready for an escrow shortage again in the future. I do know one thing for sure though, I’ll take an $80 a month change in my monthly escrow payment over paying out $1,200 in July for my home owner’s insurance and $3,500 in December for my tax bill. I’d still have to be dealing with the $480 increase in my tax/insurance bills combined, but paying it monthly through my mortgage softens the blow considerably.
How about you? Have you had issues with your escrow account in the past? Leave a comment below.