The other day I got a “coupon” in the mail. The use of the word “coupon” made me chuckle, because it was actually a bill.
It also means that our house payment is going to go up this year.
Now, if you’re a new homeowner and you have a fixed rate mortgage, you might think that you’ll always pay the same for your house every month for the next 15 or 30 years.
But if you’re putting your property taxes and insurance into an escrow account attached to your mortgage payment, that’s just not true. If your property taxes or home owners insurance premiums go up, the amount you’ll need in your escrow account to pay for them goes up, too. That means that your fixed rate mortgage bill actually has a little bit of flexing it can do.
If you end up facing escrow shortages, your mortgage company will send you a bill. They’ll also give you a few options for paying it. You can pay the bill in one lump sum, and your monthly house payment will only go up a little bit to cover the increased costs for the upcoming year.
Or you can spread the bill out over the next year in addition to the increased amount required to go into escrow. That means that your monthly house payment could take a significant jump.
In our case, we could pay off the escrow shortage of $170 and our monthly payment would go up $7.04. Or we could roll it into our payments and add $21.21 to our monthly mortgage.
I’d much rather go with the smallest monthly increase. We have the money in savings to cover the escrow shortage. But if I didn’t, then I would have to figure out where to come up with that increased money.
I’ve heard some horror stories from friends and relatives whose property taxes took huge leaps and their house payments leapt by $100 or more.
What you can do to prepare for an escrow shortage
There’s a few things you can do to prepare yourself for the shock of an escrow shortage.
First, you can make sure you pay attention to your property tax statements. If your property taxes take a large leap, you may want to contact your local tax assessor’s office to find out why. There may have been some changes in your city, county, or school tax levies you weren’t aware of. You should also make sure the tax assessor has accurate information about your home. If they have the number of bedrooms or baths wrong or other details, it could change your home’s valuation and your tax bill.
Secondly, you can pay attention to your home owner’s insurance premiums. If they’ve gone up significantly, talk to your insurance agent about it. Could your premiums be reduced by raising your deductibles? If you have carry other policies with this insurance agent, would you qualify for a multi-policy discount?
If you don’t like the costs, and your insurance agent isn’t helpful in keeping those in check, then it may be time for you to shop around for better insurance rates elsewhere.
Finally, realize that taxes and insurance rarely (if ever) go down. Make sure you set aside a little bit extra whenever you can so that you’re prepared when things like “escrow shortage coupons” arrive in the mail.