If you have a mortgage, you’ve probably heard the word “escrow” tossed around, usually right around the time your monthly payment changes and nobody explained why. Here’s a straightforward look at what an escrow account actually is and how it connects to your insurance.
The Basic Idea
An escrow account is essentially a savings account that your mortgage lender or servicer manages on your behalf. Instead of you separately paying your property taxes once or twice a year and your homeowners insurance premium whenever it’s due, the lender collects a portion of both, along with your monthly principal and interest, and holds it in that escrow account. When the tax bill or the insurance bill comes due, the lender pays it directly out of escrow. You never have to remember the due dates or come up with a large lump sum.
Why Lenders Set This Up
From the lender’s perspective, escrow accounts protect their investment in your home. If your property taxes went unpaid, the county could eventually place a lien on the property. If your homeowners insurance lapsed, the home itself — which is the lender’s collateral — would be unprotected in the event of a fire, storm, or other loss. Bundling these payments into escrow makes sure both stay current without relying on the homeowner to manage separate due dates.
Why Your Escrow Payment Can Suddenly Change
This is the part that catches people off guard. Once a year, your lender reviews your escrow account to make sure enough money is coming in to cover the actual tax and insurance bills. If your property taxes went up, or if your homeowners insurance premium increased at renewal, there may not be enough in the account to cover the next round of bills. That’s called an escrow shortage, and it usually results in one of two things: a lump sum request to make up the difference, or more commonly, an increase in your monthly mortgage payment spread out over the next year to rebuild the account.
It’s a common misunderstanding to think your mortgage payment itself went up because of the loan. Often it’s actually the tax or insurance portion that increased, and the escrow adjustment is just passing that cost through.
What To Do If Your Escrow Payment Changes
First, don’t panic, and definitely don’t ignore the notice. Your lender should send a detailed breakdown showing the new numbers for taxes and insurance separately. Take a look at which one increased. If it’s the insurance premium, that’s a good moment to call your agent and find out why, and whether shopping the policy with other carriers might bring the number back down. If it’s property taxes, that’s typically tied to your local assessment and less within an agent’s control, but it’s still worth understanding so the increase doesn’t surprise you again next year.
Keep Your Agent in the Loop
One thing that helps: let your insurance agent know if you refinance, pay off your mortgage, or change lenders, since that can affect how your insurance bill gets paid and where the paperwork needs to go.
A Second Set of Eyes Before Your Next Escrow Review
If a rising insurance premium is behind your escrow increase, Rondon Insurance Services in Edmond can help. We’re an independent agency that compares quotes across multiple carriers, so you can see whether a better rate is available before your next escrow review. Give us a call and let’s take a look.
