Why did my escrow payment go up? The annual analysis

You paid the same amount all year and suddenly a letter arrives: your monthly payment is going up. If your mortgage has an escrowescrow accountAn escrow account is an account set up by your mortgage lender to pay certain property-related expenses on your behalf, mainly property taxes and homeowners insurance. The money comes from a portion of your monthly mortgage payment: each month you contribute a share and the loan servicer pays the bills when they come due. That is why your payment is higher than principal and interest alone, and why it can change when taxes or the insurance premium go up. In some states the word also names the period between the offer and the closing.See the full definitionClose account, most likely your loan did not change; what is paid from that account did. This guide is for homeowners with escrow: it explains what your payment is made of, how the account works during the year, how to read the annual analysis, what shortages, deficiencies, surpluses and the cushion are, what you can be charged and how to dispute an error.

To receive your annual statement after the account year closes

30 days⁴

The largest the cushion can be, of the year's projected payments from the account

1/6⁴

To spread a shortage of one month's payment or more, if the servicer collects it

12 months or more⁴

From this amount up, a surplus comes back to you within 30 days

$50⁴

What your payment is made of

According to the CFPB, your total monthly payment usually has four parts: principalprincipalThe principal is the amount of money you borrowed and have to pay back, not counting the interest. In Spanish it is also called "capital". When you start, the principal is the loan amount; with every payment a part goes toward reducing it, and what remains is called the balance. Interest is computed on that balance, so the less principal you owe, the less interest you pay. On your monthly payment you will see P&I: principal and interest, the part of the payment that goes to the loan, separate from taxes and insurance.See the full definitionClose, interest, mortgage insurance if your loan requires it, and escrow for homeowners insurance and property tax. Principal and interest generally stay the same as long as you pay on time, but escrow can change: for example, if your home goes up in value, your property tax typically goes up too.¹

Example with real numbers

The parts of the payment on a typical home

With the typical US home value, an FHA loan with the minimum down payment and this week's rate.

Principal and interest (fixed with a fixed rate)

$2,213

FHA mortgage insurance

$147

Property tax (goes into escrow)

$261

Homeowners insurance, example estimate (goes into escrow)

$139

Total monthly payment

$2,759

This is an example with national numbers. Tax and insurance are the parts that change from year to year.¹ Put your own numbers in the calculator.

Run it with your numbersMortgage calculator

The CFPB lists other common reasons a payment changes: a temporary buydown ended, your adjustable rateadjustable-rate mortgage (ARM)An adjustable-rate mortgage (ARM) is a loan whose interest rate can change, usually in step with a market index. It often starts with a fixed rate for an initial period (for example, the first few years) and then adjusts at set intervals, so your payment can go up or down. The contract sets caps on how much the rate can rise at each adjustment and in total. Before accepting one, check on the Loan Estimate how high your payment could reach and whether you could afford it.See the full definitionClose changed, you started paying principal on an interest-only loan, your private mortgage insurance changed or ended, you were charged new fees, or your servicer made a mistake.² Your monthly statement breaks out each part: look at it before you call.

How the escrow account works during the year

Your lender sets up the account to pay certain property expenses from part of your monthly payment. Many lenders require taxes and insurance to be paid this way, and sometimes the law requires it. Your loan servicerloan servicerThe loan servicer is the company that sends you your mortgage statements and handles the day-to-day tasks of the loan: it processes your payments, answers your questions, keeps track of principal and interest paid and manages your escrow account, if you have one. It can also offer options if you fall behind and, in certain cases, start a foreclosure. It may be the same company that lent you the money or a different one, and it is common for another company to take over the loan after closing.See the full definitionClose manages the account and pays those bills for you.³ Regulation X, the federal rule for these accounts, includes property taxes, insurance premiums (flood insurance too) and other charges in escrow, and gives the account its own 12-month year that starts with your first payment.⁴

Your escrow account's year

1. 1. You receive the initial statement

   At closing or within 45 days

   It shows your payment, the escrow portion, what is expected to be paid during the year with dates, and the cushion selected.⁴

2. 2. You deposit every month

   Every month

   One-twelfth of what is expected to be paid in the year, plus what is needed for the cushion.⁴

3. 3. The servicer pays the bills

   Before each bill's deadline

   It must pay them on time, even if it has to advance money, as long as you are not more than 30 days late.⁴

4. 4. Account analysis

   At the end of the account year

   It compares what came in and went out, estimates next year and checks for a shortage, deficiency or surplus.⁴

5. 5. Annual statement

   Within 30 days

   It explains your new payment and how any shortage or surplus is handled.⁴

6. 6. Your new payment starts

   The following year

   If a shortage is one month's payment or more, it can only be spread over at least 12 months.⁴

To set your monthly deposit, the servicer may charge one-twelfth of what it reasonably expects to pay in the year, plus what is needed to maintain a cushion. To estimate, it uses next year’s bill if it already knows it; if not, last year’s, adjusted by no more than the latest change in the Consumer Price Index.⁴ That is why, when your tax or insurance goes up partway through the year, the account falls short: your deposits were based on the old number.

The servicer must pay your bills on time, before the date penalties would apply, as long as your payment is not more than 30 days overdue. If the account does not have enough, it must advance the money, and it can then ask you to pay it back.⁴

How to read the annual statement

At the end of each account year, the servicer must run the analysis and send you the annual statement within 30 days, along with the previous year’s projection. It must also tell you at least once a year if there is a shortage or deficiency.⁴

What to look for on the statement	What it tells you
Current and last year’s monthly payment, with the escrow portion	How much your payment rises and whether the increase comes from escrow
Total paid into the account during the year	What you deposited with your payments
Total paid out, for tax, insurance and other charges	Which bill went up and by how much
Balance at the end of the period	Whether the account came up short or has extra
How a surplus is handled or how you pay a shortage or deficiency	Whether you get money back or a charge is spread out
Why the estimated low balance was not reached, if applicable	The difference between what was projected and what happened

Regulation X requires those lines.⁴ Compare the total paid for tax and insurance with your county bill and your policy: if they match, the increase is real; if not, there may be an error.

Shortage, deficiency and surplus

Three possible results of the analysis

Short of the target balance

Shortage

• The account has less than it needs, without being negative.⁴
• If it is one month's payment or more: left alone or spread over at least 12 months.⁴
• If smaller: you may also be asked to pay it within 30 days.⁴

Negative balance

Deficiency

• The servicer had to advance money and the account went negative.⁴
• If it is one month's payment or more: left alone or spread into two or more equal payments.⁴
• Before collecting what it advanced, it must run an analysis.⁴

Extra money

Surplus

• The account has more than it needs.⁴
• If it is 50 dollars or more, you get it back within 30 days.⁴
• If less, it is refunded or credited to next year.⁴

The surplus and deficiency rules apply if you are current: payments received within 30 days of their due date.⁴

Here is the reason behind many big increases. When your tax or insurance went up, your new payment rises from two sides at once. First, the one-twelfth is calculated with the new, higher bills.⁴ Second, if the account came up short last year, the servicer may add the shortage; if it is one month’s payment or more, it can only spread it into equal monthly payments over at least 12 months.⁴ Once the shortage is paid off, that part of the increase goes away, although the new one-twelfth stays as long as the bills stay high.

The cushion is the third piece. It is money the servicer may require to cover unexpected payments or payments due before your deposits are in the account.⁴ It cannot exceed one-sixth of the year’s projected payments from the account, and if your loan documents set a lower cushion, those documents apply.⁴

The surplus and deficiency rules apply if you are current at the time of the analysis, meaning the servicer received your payments within 30 days of their due date. If not, the servicer may keep a surplus in the account or collect a deficiency under your loan documents.^{4 4}

If you think there is an error

The CFPB recommends starting with your monthly statement and calling the servicer: explain the situation, ask for a corrected statement and note a reference number, the name of the person you spoke with and the date. If it is not fixed over the phone, send a written notice of error.²

For your letter to count, the CFPB suggests including your name, address and account number, saying exactly what error you believe happened, not writing on your payment coupon and sending it to the special address your servicer uses for errors; that address may differ from the payment address. Keep paying while you wait.⁷ Under Regulation X, failing to pay your tax or insurance from escrow on time, or failing to refund the balance when required, is an error you can raise this way. The servicer must acknowledge your notice in writing within five business days and, in most cases, respond no later than 30 business days after.⁶

How to lower or control the increase

Your servicer does not set your tax or your premium: it only collects and pays them. For escrow to go down, what it pays has to go down.

• Property tax. Check that you have every exemption you qualify for; the homestead exemption guide explains how to claim the main-home one. If the value the county put on your home is high, the guide on how to appeal your property assessment explains the deadlines. The property tax guide explains how the tax is calculated.
• Homeowners insurance. The CFPB says it is usually a good idea to research the cost yourself, and that you can shop and choose the provider and plan that is right for you.⁸ If you switch policies, tell your servicer so it pays the right one.
• Private mortgage insurance. If your loan has it, the CFPB notes that your payment may change once you are able to cancel it and choose to.²

If this is you

You just bought

Your first escrow document is the initial statement, due at closing or within 45 days.⁴ Keep it to compare with your first annual analysis.

The company that collects your mortgage changed

The old servicer must send a short year statement within 60 days of the transfer, and the new one an initial statement if it changes your payment.⁴

You are selling or refinancing

When you pay off the loan in full, whatever is left in escrow must come back to you within 20 business days.⁵

You cannot afford the new payment

Call the HOPE Hotline as soon as possible, 24 hours a day, at (888) 995-4673, or find a HUD-approved housing counselor.⁷

Common mistakes

• Mistake: Throwing away your annual escrow statement unread.

  Instead: It explains what the servicer paid, your new payment and how a shortage is collected.⁴

• Mistake: Thinking you must pay the shortage all at once.

  Instead: If it is one month's payment or more, it can only be spread over at least 12 months.⁴

• Mistake: Writing your complaint on the payment coupon.

  Instead: Send a separate letter to the special address for errors.⁷

• Mistake: Stopping payments while you dispute.

  Instead: The CFPB recommends continuing your payments while you wait for an answer.⁷

• Mistake: Letting your homeowners insurance lapse.

  Instead: Force-placed insurance usually costs more and may protect only the lender.⁹

• Mistake: Blaming the servicer for a higher tax.

  Instead: Escrow changes when the tax or insurance changes; check your exemptions and your assessment.³

What to do this week

1. Find your latest annual escrow statement and compare your new payment with last year’s.⁴
2. Compare the total paid for tax and insurance with your county bill and your policy.
3. If there is a shortage, check how it is being collected: if it is one month’s payment or more, it can only be spread over at least 12 months.⁴
4. If something does not add up, call your servicer and, if it is not fixed, send a notice of error to the right address.²
5. Review your exemptions, your home’s assessed value and your insurance price to bring down next year’s escrow.⁸
6. If you cannot afford the new payment, a HUD-approved housing counselorHUD-approved housing counselorA HUD-approved housing counselor works at an agency HUD has approved to provide housing counseling: independent, expert advice customized to your situation about buying a home, renting, a missed mortgage payment, a foreclosure or credit problems. The agencies usually charge little or nothing; many serve in Spanish and offer the homebuyer education course several assistance programs require. They are not lenders or real estate agents and sell you nothing. Your county page lists the official agencies with phone numbers.See the full definitionClose gives independent advice, often free or at low cost.¹⁰ If you are already behind, the guide If you can’t pay your mortgage explains your options.