Escrow Shortage causes mortgage payment increases in Florida
Shocked by how high your monthly mortgage payment went up? Here’s why it jumped
Many homeowners across South Florida are having sticker shock when receiving notices of a shortage in escrow, after mortgage lenders notified them that their monthly payments would be going up.
It was the case for Kenneth Rankel, 58, and his husband when they received a notice from their mortgage lender last week that they had a shortage in escrow as a result of rising insurance costs, and therefore their monthly payment would be increasing by about $323 a month.
The couple isn’t alone. Mainly due to increasing insurance costs, and in some cases rising property taxes, many homeowners are receiving notices that their monthly payments will be significantly higher this year due to a shortage in escrow.
What exactly is an escrow shortage?
A homeowner’s mortgage payment consists of two parts: the actual loan amount (principle and interest) and the escrow portion of the bill.
The escrow payment is the amount that goes toward costs such as property taxes, homeowners insurance and mortgage insurance, plus a little extra as a cushion to try and make sure that the account doesn’t fall negative. The mortgage lender will collect the estimated amount of property tax and insurance each month in anticipation of the yearly bill.
“Typically the bank or servicers will send out an escrow analysis annually. That will show you how your escrow account did last year and whether you were escrowed enough to cover the costs of taxes and insurances or was it just enough,” said J.C. de Ona, southeast Florida division president of Centennial Bank.
Some years there aren’t much changes, but other years, homeowners can receive notices of a shortage in escrow, or a notice that there aren’t enough funds in the account to cover that amount due, because of an unplanned increase in insurance or taxes.
Let’s say a homeowner was saving $200 a month in their escrow account because their insurance bill was $2,400 a year. Now, when the new year hits, the insurance policy doubled on their home and it’s now $4,800 a year.
Not only does the lender have to pay the $4,800 up front, they also have to start budgeting for the perceived cost for next year as well.
Double increase: property taxes and insurance costs
For homeowners who received notices of escrow shortages, the most likely reason is due to increased insurance costs.
Another reason — though less likely since many homeowners have a homestead exemption — could be an increase in property taxes. It’s more likely to happen to a homeowner who purchased a home in the past year or two, or for those who might have an investment property.
“Something our office sees often is that a homeowner’s first tax bill may reflect the exemptions accrued by the previous homeowner. The second property tax bill after the new resident has owned the property for a full year would reflect the current owner’s exemptions, and often, those savings may be lower than the previous owner’s,” noted the Palm Beach County Property Appraiser’s office.
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