The options for escrow shortage, when you have a mortgage, your escrow account allows you to make payments toward your property taxes and insurance in manageable monthly increments. This is better than having to cover the costs in one big lump sum each year. When that escrow account doesn’t have enough money in it to cover these costs, that’s called an escrow shortage.
Whether you find yourself facing escrow shortage or an escrow deficiency, there are two options for escrow shortage payments. Firstly, you can make one lump-sum payment of the escrow shortage balance. The second option is to make monthly payments over a 12-month period.
What does an escrow account do and why is it so vital to your mortgage?
Most borrowers’ mortgage payments are made up of four different pieces. These pieces include: principal, interest, taxes and insurance. They could be abbreviated as PITI.
The principal and interest portion of your payment are directly related to your mortgage. Principal is what you pay toward the amount you owe. Interest is the extra money you’re charged on that amount.
Taxes and insurance are the property taxes you need to pay on your home. It includes your ownership home owners insurance premium and – if necessary – your mortgage insurance premium. Tax and insurance payments do not go directly to your lender or loan servicer. However, they will collect a portion of these payments each month and hold them in a third-party escrow account until those bills come due. Then, your servicer will pay these bills on your behalf using the money in your escrow account.
Where does escrow money come from?
Your escrow account is funded by your monthly mortgage payments. For instance, if you buy a home with a yearly property tax of $5,000 and costs $2,000 per year for a homeowner’s insurance policy, it may be tough to pay all these in one lump sum. Therefore, your mortgage servicer will divide these amounts by 12. This way, you can set aside $417 each year to offset your property tax and $166 each year to cover your insurance premium. This way, you can have enough money to cover your full bill for the year once it becomes due.
Your mortgage servicer will add both of these numbers to your principal and interest payment. You’ll pay this resultant amount to your servicer. Your servicer will now take the principal and interest as payment for your mortgage. Then, he will put the rest into your escrow account.
Thus, escrow acts as a sort of savings account, where you put in a little bit of money each month. This will help to avoid having to make one large lump sum payment when taxes and insurance are due.
What is the role of the yearly escrow analysis?
Escrow analyses is usually performed by your lender or servicer at least once in a year. Through this analysis, you’ll know if you have a shortage and if your monthly payments will increase the next year due to an increase in your taxes or insurance rate. Through this you will know if you have options for escrow shortage.
In escrow analysis, your servicer will project how much you’ll owe out of your escrow account in the coming year. They’ll use that number to calculate your new monthly payment. Your payment may remain the same, increase or, less commonly, decrease.
If you have an escrow shortage due to an increase in your property tax rate, you’ll likely have a higher monthly payment from then on. This is to ensure you have enough in your escrow account to cover the increase.
What is the difference between an escrow shortage and an escrow deficiency?
In an escrow shortage, you still have money left in your escrow account. But it is not enough to pay your tax and insurance bills.
If you have an escrow deficiency, it means that your escrow account has a negative balance. This usually happens if your lender had to pay your tax or insurance bills using their own funds because you didn’t have enough money in your account to cover them.
How can your escrow increase if you have a fixed-rate mortgage?
Recall that the interest you pay on your mortgage is part of what you pay to your lender. It doesn’t go into your escrow account, because it’s a part of your actual mortgage. If you have a fixed-rate mortgage, your interest rate will not change for your entire mortgage term.
The costs that your escrow account covers, taxes and insurance, are included as part of your total monthly mortgage payment. However, they’re separate from the actual mortgage. Your lender or servicer does not control these costs. Local governments are responsible for property tax increases and homeowners insurance companies set their own rates.
Therefore, if you have a fixed-rate mortgage, the mortgage part of your payment will remain the same. However, the portion of your payment that goes to your escrow account can change if your tax or insurance costs fluctuates.
How can you avoid an escrow shortage?
You can’t possibly anticipate changes to your tax and insurance costs. However, you can be proactive by keeping track of your escrow account. You can also have additional savings set aside for unexpected home-related costs, such as an escrow shortage.
Does an escrow analysis really only happen once a year?
Escrow analyses are sent out to borrowers once in a year. However, a lender or servicer can complete more than one analysis in a year. This is possible if there are issues with the first one or if the borrower disputes their analysis. Ordinarily, though, they’ll do just one escrow analysis each year.
Can you pay your escrow shortage with a credit card?
Probably not. Mortgage lenders generally don’t allow borrowers to use credit cards to make mortgage payments.
How can you pay off an escrow shortage?
Most lenders allow borrowers to either pay their escrow shortage in one lump sum or spread out the payment in equal monthly installments over a 12-month period.
Can you pay your escrow shortage online?
The answer to this completely depends on your lender. However, if you make your regular monthly payments online, you’ll usually be able to pay escrow shortages, online as well.
Options for escrow shortage, Escrow accounts come with the benefit of making your yearly tax and insurance payments more manageable. However, it is important to understand that, even with a fixed-rate mortgage, changes to your taxes or insurance can lead to an escrow shortage and a higher monthly payment.
As a homeowner, it’s always good to be prepared for unanticipated one-time costs or increases in your regular costs. When it comes to your escrow account, keeping a track on it and having a savings can help prepare you in the event that you end up with a shortage.