If your mortgage comes with an escrow account, you pay an extra sum of money every month that gets used to pay your property taxes and home insurance. The escrow account holds the money until these bills are due. Since your mortgage company usually analyzes your escrow account once a year to make sure that you're paying the right amount into it, semiannual payments can cause inaccuracies.
While escrow accounts take monthly payments for annual expenses, the real world doesn't always work that way. Property taxes are due in installments that get paid twice or, in some parts of the country, four times per year. Some insurance premiums are also only quoted on a six-month basis, requiring two payments.
Changes in Payments
Given the fact that you could have multiple payments due at multiple times, there are many opportunities for your expenses to change. Annual homeowner's insurance premiums are usually due around the anniversary date of when you bought your house, which may or may not be the date that the mortgage does its escrow analysis. Semiannual premiums can change every six months. Property taxes usually change yearly, and they change starting on the first day of the property tax year, which may or may not be the first day of the calendar year.
Since your lender doesn't constantly recalculate your escrow account, it's possible that you may not have enough money in it when a bill goes up. For instance, if your annual insurance is $1,000 and your taxes are $1,100, your escrow account should always have somewhere between $350, which is a two-month cushion, and $2,100. However, if your insurance skyrockets to $2,500 after a claim, your account could end up with a negative balance after paying the premium. This is called a shortfall.
Your escrow account is supposed to pay bills that are due, even if it doesn't have enough money to cover it. When that happens the lender will recover its money from you. Not only will it look to collect the negative balance, but it will also adjust your escrow payments upwards so that the shortfall doesn't happen again. Generally, you can choose between paying off the initial shortfall in a lump sum or paying it off over time. The only way to avoid this problem is to add to your escrow account when you know that a higher-than-expected bill is coming.
- City of Boston: Real Estate Taxes, Tax Bills and Payments
- Texas Window on State Government: Property Tax Calendar
- Washington State Department of Revenue: 2012 Property Tax Calendar
- First Michigan Bank: Escrow Shortage Explanation
- HUD.gov: FAQs About Escrow Accounts for Consumers
- Cornell Law School. "Escrow." Accessed March 15, 2020.
- Los Angeles County Consumer and Business Affairs. "Escrow." Accessed March 15, 2020.
- Consumer Financial Protection Bureau. "What Is an Escrow or Impound Account?" Accessed March 15, 2020.
- The People's Law Library of Maryland. "Rent Escrow: When the Landlord Fails to Make Repairs." Accessed March 15, 2020.
- California Department of Business Oversight. "Online Escrow Fraud Questions and Answers." Accessed March 15, 2020.
- Consumer Financial Protection Bureau. "Mortgages Key Terms." Accessed March 15, 2020.
- FindLaw. "Connecticut Security Deposit Laws." Accessed March 15, 2020.
Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.