Can a Mortgage Company Raise Your Escrow on an Analysis?
As a homeowner with a mortgage, you're probably familiar with the concept of an escrow account. This account is used by your lender to pay your property taxes and homeowners insurance premiums on your behalf. While this arrangement can be convenient, it's important to understand that your mortgage company has the right to adjust your escrow payments based on an annual analysis. In this article, we'll explore when and why lenders can raise your escrow amount, and what you can do to prepare for potential increases.
Understanding Escrow Accounts
An escrow account is a dedicated fund that your mortgage lender sets up to collect a portion of your monthly mortgage payment. This money is then used to pay your property taxes and homeowners insurance premiums when they come due. The idea behind escrow accounts is to spread out these potentially large expenses over the course of the year, making them more manageable for homeowners.
Why Lenders Conduct Escrow Analyses
Your mortgage company is required by law to conduct an annual escrow analysis to ensure that the amount you're paying into your escrow account is sufficient to cover your upcoming property tax and insurance bills. This analysis takes into account any changes in your tax rates or insurance premiums, as well as any shortages or overages from the previous year.
If the analysis reveals that your current escrow payments are not enough to cover the upcoming expenses, your lender has the right to increase your monthly escrow payment amount. Conversely, if the analysis shows that you've been overpaying into your escrow account, your lender may decrease your monthly payment or issue you a refund.
When Escrow Increases Can Occur
There are a few common scenarios that can lead to an increase in your escrow payments:
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Property Tax Increases: If your local government raises property tax rates, your mortgage company will need to adjust your escrow payment to account for the higher taxes.
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Homeowners Insurance Premium Increases: Insurance companies may raise their rates due to various factors, such as increased risk of natural disasters or higher construction costs. These premium increases will also be reflected in your escrow payment.
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Shortage from the Previous Year: If your escrow account didn't have enough funds to cover the previous year's expenses, your lender may need to increase your payments to make up for the shortage.
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Initial Escrow Miscalculation: In some cases, your initial escrow payment amount may have been miscalculated, leading to a need for adjustment later on.
What You Can Do
While escrow increases can be frustrating, there are steps you can take to prepare for and potentially minimize these adjustments:
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Review Your Escrow Analysis Carefully: When you receive your annual escrow analysis statement, review it thoroughly. Make sure you understand the reasons behind any proposed increases and verify that the calculations are correct.
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Dispute Errors: If you believe there are errors in the escrow analysis, don't hesitate to dispute them with your lender. Provide documentation to support your case, and follow up until the issue is resolved.
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Budget for Potential Increases: As a general rule, it's a good idea to budget for potential escrow increases each year. This way, you won't be caught off guard if your payments go up.
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Consider Paying Taxes and Insurance Directly: While it may be more work, some homeowners choose to pay their property taxes and insurance premiums directly, rather than through an escrow account. This can give you more control over these expenses and eliminate the need for escrow adjustments.
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Refinance or Shop Around: If your escrow payments become unmanageable, you may want to consider refinancing your mortgage with a different lender or shopping around for a better deal.
Conclusion
While escrow increases can be frustrating, they are a reality for many homeowners. By understanding why these increases occur and taking proactive steps to prepare for them, you can minimize the impact on your budget and avoid surprises. Remember, your mortgage company is required to conduct these analyses to ensure that your escrow account has enough funds to cover your property tax and insurance obligations. By working with your lender and staying informed, you can navigate escrow adjustments with confidence.