Understanding Escrow Accounts and Managing Rising Homeowners Insurance Costs

Hey there, fellow homeowners! If you’ve recently stepped into the world of homeownership (congrats, by the way!), you might be juggling a lot of new terms and responsibilities. One such term that often pops up is ‘escrow account.’ With the recent hike in homeowners’ insurance rates, especially in places like Texas, it’s super important to get the lowdown on how these changes can affect your mortgage payments. We’re here at The Richard Woodward Team NEXA Mortgage to break it down for you in an easy-to-understand way.

So, What’s an Escrow Account Anyway?

Think of an escrow account as a piggy bank that’s part of your mortgage deal. This account is handled by your lender and is used to stash away money for property taxes and homeowners insurance. Each month, a slice of your mortgage payment is tucked into this escrow account. This setup makes sure you’ve got enough cash to cover those big bills when they’re due.

How Do They Figure Out My Escrow Payment?

Your lender plays a guessing game with your yearly property taxes and insurance bills, then divides that total by 12. That’s your monthly escrow payment. But remember, it’s based on last year’s numbers, so it’s more of an educated guess.  It is highly likely that your insurance and property taxes will increase most years.

Why’s My Escrow Payment Going Up?

If your insurance premium gets a bump up (which is happening a lot these days), your lender will need to adjust your escrow payment to cover the new, higher amount.  If there is not enough money in the current escrow account to pay your higher insurance and tax bills, the lender will advance those funds for you to make sure you still have insurance and your taxes are paid in full.  Now the bad part, since they advanced funds to cover this years bill, they add that amount to your new bills, then divide that by 12.  So not only are your putting enough money aside for the future bill, you are paying back the escrow advance.

For example.  Your new insurance bill is $2000 / $500 higher than last year.  Your new tax bill is $5000 / $700 higher than last year.  That means your escrow shortage is roughly $1200.  Normally your escrow payment would be $2000+$5000=$583.33 monthly but because of the shortage, it is actually $2000+$5000+$1200= $683.33 monthly.  That is an increase of $283.33 from the previous year.

Dealing with the Jump in Homeowners Insurance

When insurance rates go up, so does your escrow payment. And since this is part of your monthly mortgage payment, you’ll notice your overall payment going up too.

How to Handle These Escrow Hikes

1. Shop Around for Insurance

Just like you’d hunt for the best deals online, shop around for a more wallet-friendly homeowners insurance. A little research can lead to some nice savings.  Once you find a better policy at lower rates, call your mortgage loan servicing company and ask them to provide you with instructions on how to update your insurance policy.

2. Payment Options for Escrow Shortage

Homeowners can address an escrow shortage by either making a lump-sum payment or spreading the payment over 12 months.  If you call your mortgage servicing company and tell them you want to pay the shortage in a lump sum, it will help to keep your monthly payment more manageable.

3. Check Your Escrow Account Annually

Make it a yearly ritual to peek at your escrow account. It’s like a financial health check-up for your home.

4. Save Up Just in Case

Setting aside a bit of cash each month can soften the blow if your escrow payment jumps up.  You can even have this payroll deducted into a separate savings account, so you are not as tempted to spend it.  How knows, you might get lucky and build a nice saving for any number of purposes.

5. Think About Refinancing

If you can snag a lower interest rate, refinancing your mortgage might be a smart move.  Your escrow accounts will be reset then.

6. Challenge Your Property Tax

If you feel like your property tax is through the roof, don’t be shy to challenge it. You might end up lowering your taxes and your escrow payment.  When you get your property estimated tax bill in April, you can file a protest or appeal to help lower your tax bill.  If you need help, you can contact us at (214) 945-1066 or learn more here.  APPRAISAL PROTESTS AND APPEALS

Wrapping It Up

We get it – managing a mortgage can feel like a grown-up test you didn’t study for. But getting the hang of escrow accounts and dealing with the twists and turns of homeowners insurance rates is totally doable. And hey, we’re here to help you through it all. Swing by www.mortgageprosus.com for more tips and tricks. Happy homeownership!