Escrow Accounts Explained: Why Your Mortgage Payment Can Change

"My loan is fixed. Why did my payment go up?"

I hear this a lot. The answer is almost always escrow.

What Escrow Is

An escrow account is where your lender or servicer collects part of each month's payment to cover your property taxes and homeowners insurance. When those bills come due, the servicer pays them for you.

Your payment has two parts. Principal and interest are fixed on a fixed-rate loan. Taxes and insurance are not, and they are what change.

Why the Payment Moves

Once a year, the servicer reviews your escrow account. They look at what was collected, what was paid out, and what they expect to pay in the year ahead.

If taxes or insurance went up, the monthly amount goes up to match. Insurance costs, in particular, can move quickly.

Federal rules under Regulation X shape how this works:

• The servicer can hold a cushion in the account, capped at one-sixth of the year's expected payments, which is about two months.
• You are entitled to an annual escrow statement showing what came in, what went out, and what is projected.
• If the account ends up short, the servicer often spreads the shortage over 12 months or more, though a small one may be due within 30 days.
• If there is a surplus of $50 or more, the servicer is required to refund it.

A Shortage Is Not a Penalty

A shortage just means the account did not collect enough last year, usually because a bill went up. You will typically see two changes: the shortage gets repaid, and the monthly amount gets raised so it does not happen again.

If you have the cash, ask whether you can pay the shortage in one payment. That can keep your new monthly amount lower.

How to Keep Surprises Small

• Shop your homeowners insurance every year or two.
• After you close in Nevada, watch for the county postcard and reapply for the 3% owner-occupied cap so your tax bill does not rise faster than it should. I explain that in Nevada Property Tax.
• Read your annual escrow statement instead of tossing it. It tells you exactly why the payment changed.
• If a bill looks wrong, call the servicer and ask them to walk through it.

Do You Have to Have One?

Often yes. FHA loans require escrow. Many other loans do as well, and some conventional loans may allow you to waive it depending on your down payment and the lender's rules. Ask up front, because waiving can come with conditions.

For a full picture of what you pay at closing and after, see The Truth About Closing Costs.

Know Your Real Payment Before You Buy

The payment on your loan estimate is the number to plan around, and taxes and insurance are part of it. Let's make sure the estimate you are working with is a realistic one.

Get started here or book time on my calendar and we will walk through it.

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Mike Prenesti, NMLS #1033445. Nexa Lending, LLC, NMLS #1660690. Equal Housing Opportunity. Licensed in Nevada. This article is for educational purposes only and is not a commitment to lend or financial advice. Escrow rules and options vary by loan and servicer. Not all borrowers will qualify. Program guidelines vary by investor and are subject to change.