PFT #99 - Personal Finance Tip of the Week: The Annual Escrow Analysis

For most owners, when they purchase their homes, the monthly mortgage payment is a fixed amount for 30-years and sometimes 15, people still become accustomed to a standard payment each month.

On top of the mortgage payment is an escrow account established by the lender to manage payments typically for property taxes, homeowners insurance, and, in some cases, private mortgage insurance (PMI). 

So each month these expenses are wrapped up as the total monthly payment and the lender pays them on the homeowner’s behalf. However, when people sign on the dotted line, they are not informed that this payment may change on a yearly basis; and this is due to the yearly escrow analysis. This is one of those hidden budget tips that no one tells you about. 

So what may change? 

Over the course of a year, property taxes and insurance premiums may fluctuate. For the most part taxes will continue to rise as the world becomes less predictable with the environment.
 
With natural disasters becoming more common, oftentimes homeowner’s insurance rates will increase in geographical areas where there weren't unfortunate events. 

The other common increase occurs in the first year of home ownership. Taxes are based on the assessed value of a home; however, these values are often suppressed meaning they are not accurately updated each year. Hence, in the first year of ownership, the assessed value can increase to be accurately reflected and this can generate a large spike in the overall tax amount. 

In addition, local governments may also increase your bill as property values rise each year or there may be cases where a millage is added to improve parks, libraries, community centers and the like. 

So what happens annually?

The lender will review any changes and compare them with the initial cost estimates. If there is an increase, the lender will adjust the monthly escrow payment to cover the new amounts spread over the course of the year. In the event of a surplus of $50 or so, the lender is typically required to refund the excess amount. 

So how do I prepare? 

For the most part there is nothing that you can do. Know that if you filed an insurance  claim, or major disasters occurred  across the country or you bought a new home, or if your municipality has approved a special assessment, your taxes will most likely rise.

This is why it is important to have available disposable income to account for the increases in your budget.

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