By Mike Miles
If you own a home and make a mortgage payment, you probably have escrow included in your payment. Which escrows are included in a payment? Typically, it’s either property taxes, homeowner’s insurance, or both. Part of the mortgage payment goes toward the loan, part of it contributes to the insurance escrow, and part of it contributes to the property tax escrow account. So if mortgage payments are made on time each month, how could an escrow account ever be short? And what happens when it is short?
Taxes and insurance have annual bills that are paid out by mortgage loan servicers on specified due dates. Your insurance due date is dependent on when your policy renews. Your tax due date is every six months in Kansas (May and December) and every 12 months in Missouri (December). Here is an example of what an escrow summary could look like for a mortgage on a Prairie Village home:
In this example you can see at the end of the year there is a shortage of $162. This schedule keeps going and if the homeowner changes something — selling their home, or changing insurance policies, for example — the renewal date could change. So if nothing changes in this example there would be an additional deficiency of $514 every year. Additionally, insurance premiums and property taxes typically increase every year so the payouts as we see them in May, August and December will increase and cause an accelerated deficiency.
Most of the time, escrow accounts are short is for two reasons. First, the account wasn’t set up correctly when you closed on your most recent loan. When this happens, too little is accounted for. Every time you close a loan your escrow account is supposed to have the proper number of months reserves to supply your tax and insurance payment dates plus a two-month cushion. That cushion allows for an excess to compensate for when tax and insurance premiums increase. Secondly, the homeowner could have experienced a large increase of either an insurance premium or tax amount or both since the time of closing a home loan. If an increase is too much too soon, the two-month cushion may not be able to compensate sufficiently.
When escrow accounts are in a shortage, the lender will provide a couple options to get the account caught up in addition to raising your escrow portion of your payment to keep pace with the scheduled insurance and tax payouts. The two options are:
- Pay a lump sum at one time to eliminate the account shortage
- Prorate the shortage over a period of time (usually up to 12 months) to eliminate the shortage
If you experience an escrow shortage the first thing to do is look at your escrow disbursement summary. This should be found online with your account, or you may have to call the lender to request it. Seeing the summary should help you understand what caused the shortage. You may have an opportunity to revisit your insurance policy too. You’d be surprised at how many times your premium may increase yearly during the policy lifespan, so getting a quote could make an impact.
Feel free to ask questions or learn more information by calling Mike or his team at Fountain Mortgage. He can be reached at 913.745.7000 or by email at [email protected].
This weekly Sponsored Column is written by Mike Miles of Fountain Mortgage. Located in Prairie Village, Fountain Mortgage is dedicated to educating, and thus empowering, clients to make the best financial decision possible for their situation. Contact Fountain today.
Mike Miles NMLS ID: 265927; Fountain Mortgage NMLS: 1138268