Escrow Explained: Why Your Mortgage Costs Might Vary
Buying a home is a big deal, and escrow accounts are a normal part of the homebuying process. But escrow can be confusing for many homeowners. What exactly is escrow, and why do payments change? If your payments rise, it can be frustrating, but this change isn't decided by your lender.
What is an Escrow Account?
Think of an escrow account as a special savings account for your home-related expenses. It's used to pay things like:
- Property Taxes: The yearly taxes you pay on your home.
- Homeowners Insurance: Insurance that protects your home.
- Private Mortgage Insurance (PMI): This might be required if you made a small down payment.
Your lender estimates these costs and divides them into monthly payments. These payments are added to your regular mortgage payment. This makes it easier for you to pay these big bills and ensures they're paid on time.
Why Did My Escrow Payment Go Up?
Escrow payments can fluctuate, and several reasons can cause an increase:
- Property Taxes: As property values rise, local governments may reassess and increase property taxes. This directly impacts your escrow account, as higher taxes mean higher monthly payments.
- Homeowners Insurance: Insurance premiums can also increase due to factors like inflation, a rise in claims in your area or changes to your policy coverage. For example, natural disasters or other significant events in your region can lead insurance companies to raise premiums.
- Escrow Shortages: If the initial estimates for taxes and insurance were too low, or if these costs increased unexpectedly, a shortage can occur. Lenders will adjust future payments to make up for this shortfall.
- PMI Adjustments: If your down payment was less than 20% of the home's purchase price, you are likely to have PMI. Changes in PMI rates or requirements can also affect your escrow payments.
How to Manage Increased Escrow Payments
Understanding how to manage increased escrow payments can help you budget your money better, making payments easier in the future. If your payments have gone up significantly, here are some choices you can consider:
Refinance Your Mortgage
Refinancing your mortgage can be a smart financial move in certain situations. It offers the potential to lower your monthly payments, including escrow, and save you money over the life of your loan. Want to see if refinancing makes sense for your financial situation? A refinance calculator can help you explore the possibilities and determine if it's the right choice for you.
Consult An Expert
Home loans can be complex. Connect with a Georgia United home loan consultant for personalized advice. Schedule a video, phone or in-person appointment to get expert guidance tailored to your needs. We're here to help you every step of the way.
Start An Emergency Fund
Homeownership comes with unexpected costs. Be proactive and protect yourself from financial surprises by building a strong emergency fund. A High Earning Savings Account from Georgia United Credit Union allows you to grow your savings with competitive interest rates while ensuring your funds remain accessible for any unforeseen expenses.
Planning for the Future
Planning ahead for potential changes in your escrow payments is a smart financial move so you can keep your finances on track and reduce stress. Rising property values, while great for resale, can lead to higher property taxes and therefore, increased monthly mortgage payments. By addressing existing debt, you can free up more of your income to handle unforeseen expenses. Check out Georgia United's webinar, "Breaking Free From Debt," for tips on managing debt, and use our online budgeting tool to keep an eye on your spending.
At Georgia United, we recognize that financial surprises can be daunting, but you don't have to handle them on your own. We're here to help you navigate life's ups and downs, providing the support and guidance you need.
*Georgia United is an Equal Housing Lender.