Mortgage Escrow: Potential Housing Increase
Home buyers who put less than 20% down payment on a home purchase will normally be required to have a mortgage escrow from their mortgage lender for property taxes and homeowners insurance. Those home buyers who put 20% or more in down payment on a home purchase can waive mortgage escrow and can pay their property taxes and homeowners insurance when it is due separately. For those with a mortgage escrow, the mortgage lender will review their mortgage escrow account once a year to see whether the mortgage escrow needs to be increased or decreased in order to make sure there are sufficient funds to cover any increases in property taxes and/or homeowners insurance premiums.
Escrowing Property Taxes On A Home Purchase
Most states have property taxes re-assessed the year following the home purchase. The property taxes can potentially go up the second year the homeowner owns the home. This can really hurt a homeowner who barely qualified for his or her mortgage loan with high debt to income ratios and any increase in monthly payments can affect their monthly financial budget. There are cities like Chicago, Illinois where property taxes went up double digits year after year in the mid 1990’s and 2000’s where many fixed income homeowners were forced to sell their homes and relocate due to the high property taxes. Property taxes normally go up when the value of the property goes up. If you purchase a new construction home from a builder, the initial property taxes are assessed on the property taxes of the unimproved lot and the property taxes most likely will go up the second year you own your home which means your mortgage escrow will go up significantly to cover the increased property taxes.
Escrowing Homeowners Insurance Premium
Homeowners insurance premiums are also held in a mortgage escrow. Homeowners insurance premiums can also increase significantly. For example, if you live in Miami and have hurricane insurance and severl major hurricanes hits your area year after year, your insurance carrier will most likely increase your hurricane insuranc premium.
Mortgage Escrow: How Lenders Determine Mortgage Escrows
Once a year, the mortgage lender who is servicing the mortgage loan completes a mortgage escrow analysis statement and is mailed to every mortgage loan borrower the lender services. The statement will show the amount collected every month and the amount disbursed for property taxes and homeowners insurance.
As an example on how your mortgage escrow account can drastically increase is the following. If you were to close on a home now and the property taxes need to be paid in November of every year, your property taxes for the first year is based on the seller’s previous year’s property taxes. Say the next year rolls around and you receive a mortgage escrow analysis by your mortgage lender in January of 2015. If the property taxes has not been re-assessed by your county, your mortgage escrow will remain the same since the mortgage lender is still going off the current property taxes. Say that your mortgage lender finds out that your property taxes are re-assessed in October of 2015 and come November of 2015 pays the county the new higher re-assessed property taxes. Come January 2016 when you get your mortgage escrow analysis, your mortgage escrow will increase due to the increase of property taxes.
Property Tax Increases
This can be confusing so the best way to explain this is via an example. For example, if your property taxes has increased by $3,600, that means your additional monthly payment towards property taxes will be $300.00 per month. You need to pay an additional $300.00 per month for the coming year. However, you had a shortage of $3,600 for the prior year property taxes since property taxes are always paid in arrears. This means that your mortgage lender will escrow the prior year’s monthly shortgage of $300.00 plus the coming year’s additional $300.00 per month for a total $600.00 in increased mortgage escrow. This type of payment shock in your mortgage escrow can devastate a homeowner, especially those on fixed income.
Solutions For Those Who Have Payment Shock Increase
If you had a sharp property tax hike and your mortgage escrow has gone up significantly and have trouble paying for it, contact your mortgage lender immediately and explain them your situation. Your mortgage lender can offer you various options. Contact them before you get behind on your mortgage payments because they are more opt to help you when you are current. One of the options your mortgage lender may do is to spread out your mortgage escrow payments to alleviate you from the sudden payment shock. Another option you may try is to contact the county and see if they have any hardship programs to reduce your property taxes. Many counties have special programs to cap property taxes on the elderly, disabled, or those with fixed income.
Increases Of Mortgage Escrow Due To Homeowners Insurance Premium Increase
Homeowners insurance premiums can increase like property taxes which will result in an increase of your mortgage escrow. For example, if you have file a homeowners insurance claim on your home, the chances are that your homeowners insurance premium will go up. If your mortgage lender does not catch the increase of homeowners insurance premium until the next mortgage escrow analysis cycle, you are most likely due to a payment shock.