Budgeting for Your Home: Understanding and Addressing Escrow Shortages
Have you ever gotten a notice from your mortgage lender about an "escrow shortage"? It might sound scary, but don't panic! This blog post will explain what an escrow shortage is, what causes them, and how you can resolve it.
What is an Escrow Account?
An escrow account is basically a savings account held by your mortgage servicer. Each month, a portion of your mortgage payment goes into this account to cover your property taxes and homeowner's insurance. This way, you have a designated fund for these annual expenses, avoiding a big lump sum payment.
What's an Escrow Shortage?
An escrow shortage happens when there isn't enough money in your escrow account to cover your upcoming property taxes or homeowner's insurance. This can be inconvenient, but it's important to address it to avoid any late fees or penalties.
What Causes Escrow Shortages?
There are two main culprits for escrow shortages:
Increases in Property Taxes or Insurance: Typically your property tax value will be reassessed after purchasing a home, causing an increase in your property taxes, or your homeowner's insurance premium increased due to a claim or rising costs.
Inaccurate Initial Escrow Estimate: When you first got your mortgage, the estimated amount put into escrow might not have been quite enough based on actual tax bills and insurance costs.
How to Deal with an Escrow Shortage
Your mortgage servicer will typically notify you of a shortage and outline your options. Here are what you can expect:
Increased Monthly Payment: The most common solution is for your monthly payment to go up. This ensures there's enough money in escrow to cover future bills.
Pay a Lump Sum: You might have the option to pay the entire shortage amount in one go. This can be a good option if you have the savings and want to avoid a higher monthly payment.
Staying on Top of Your Escrow
Escrow shortages are a common occurrence, but there are ways to be proactive:
Review Your Escrow Analysis: Your mortgage servicer should send you an annual escrow analysis statement. This details your escrow account and lets you know if an adjustment to your monthly payment is needed.
Consider Making Additional Payments: If you know your property taxes or insurance are likely to increase, you can voluntarily add extra money to your escrow account each month.
By understanding escrow shortages and taking steps to manage them, you can avoid any surprises and ensure a smooth homeownership experience.
