Annual Escrow Analysis: Why Your Mortgage Payments May Have Changed

When you purchased your home, your monthly mortgage payment was likely a big consideration. You set a budget and shopped around for lenders to find a house and rate you could afford.

But now — surprise! Your payment has changed, even though your rate is the same. What happened?

The answer likely lies in your annual escrow analysis. Once a year, your lender reviews your escrow account to ensure that there’s enough money to cover your taxes and insurance premiums. If this number changes, so will the amount you’re required to pay.

While it can be frustrating to be told to pay more, these numbers aren’t up to your lender. It’s also possible for your taxes and insurance costs to decrease. If that happens, the amount that you’ll be required to pay each month will be less.

How does escrow work?

Typically, your monthly mortgage payment is four separate costs bundled into one. These include your principal balance, your interest, your property taxes and your insurance premium. The insurance premium includes your homeowners insurance and, if required, your private mortgage insurance (PMI). Your lender controls and keeps the payments toward your balance and interest, but it holds the tax and insurance payments in an escrow account to disperse on your behalf to their respective providers.

You’re required to keep a minimum amount in your escrow account to cover the full amount of your bill, which varies depending on where you live. If your lender finds that your account has more money than necessary in their annual analysis, they could send you a check for the difference. If the account is short, your monthly payment will be adjusted accordingly.

How to read your escrow analysis

Your lender is required to send you an account statement within 30 days of completing their analysis. This statement will include:

• Your current monthly mortgage payment, including the amount that goes towards the escrow account. 

• The monthly payments you made in the past year and the portion that went into your escrow account. 

• The total amount paid into the escrow account in the past year. 

• The balance on the account at the end of the analyzed period, including how much was paid toward both taxes and insurance.

• Details on what the lender will do with a surplus balance or how they’ll require a shortfall to be covered. 

• An outline of the difference between the previous required payment and the new payment. 

Ways to lower your monthly mortgage payment

If your monthly mortgage payment is now higher than you’re comfortable with, you have a few options for lowering it.

• Shop around for a new insurer. If your mortgage payment rose because of your homeowners insurance premium, you might get a better deal elsewhere. If you made improvements or renovations that improved the safety of the home, you may qualify for a reduced premium. However, you may have to pay a penalty if you cancel your policy before it expires. 

• Refinance or modify your mortgage. If you can refinance your mortgage to a lower interest rate, then you can lower your overall mortgage payment — potentially offsetting a larger escrow account balance requirement. You can also use refinancing or modification as a means of extending your loan term. This would give you more time to pay off your mortgage, lowering the amount you’re required to pay each month. However, you’ll end up paying more interest overall. 

• Get rid of private mortgage insurance. If you put down less than 20% when you purchased your home with a conventional mortgage but now have at least 20% equity, you can discuss dropping PMI with your lender. Remember, your equity goes beyond the mortgage payments you’ve made — if the house is now worth more than when you purchased it because of factors like appreciation or renovations to the home, that difference is included in your equity. 

» MORE: How to lower your monthly mortgage payment

Who to contact for more information

If you have further questions about your escrow account or if you think that there’s an error in your analysis, you can contact your mortgage lender.

If your escrow account balance requirement has risen because your property taxes have increased, you can review the website for your state’s treasury or revenue department. You might be eligible for a property tax relief program. For example, Nebraska residents may receive tax relief if they’re over 65, a veteran or physically or mentally disabled.

If your homeowners insurance is the source of your larger escrow account balance requirement, you can contact your insurance provider and explore options for lowering your premium. This may involve increasing your deductible, bundling your home and auto insurance, or applying for discounts, among other strategies.