Exterior of house with landscape.If you’re like a majority of homeowners today, you have a mortgage with an escrow account. And like most of those homeowners, you understand the basics of escrow, but when it comes to shortages and overages, it can be difficult to keep it all straight.

As a quick refresher, an escrow account is an account that holds the funds you need to pay your property taxes and homeowners insurance. It’s not an account that you manage directly. It’s simply a holding account that contains the funds you pay every month to ensure your taxes and insurance bills are paid.

By consolidating these payments into your monthly mortgage payment, you only have to worry about one bill rather than several bills all due at different times. We help you by making sure you have enough money in your account to cover your bills; then when they’re due, we pay them on your behalf. It’s a service that is designed to make your life easier.

So where does that money come from? It comes directly from your monthly mortgage payment. When you’re looking at your payment amount, it’s helpful to view the payment as two categories – one for principal and interest (the amount that goes toward paying off your home loan) and the other for property tax/homeowners insurance. How much of the money you pay that goes to your escrow account is determined by your yearly escrow analysis. The difficulty comes when trying to accurately estimate or predict the amount of taxes that will be required of you in the coming year.

Sometimes it’s overestimated, but often it’s underestimated. That’s where the escrow shortage appears. The most common reason for a shortage – or an increase in your payments – is an increase in your property taxes.

For example, if you buy a home that was built for you, your initial tax assessment will more than likely only consider the land value of the home. But once the property is assessed again, it will include the land value PLUS the value of your home. As a result, your property taxes will increase and so will your escrow payment. Which means, ultimately, your monthly mortgage payment will increase.

In other words, an escrow shortage is the result of not having enough money in your escrow account to cover the actual amount needed to pay your bills. It sounds as simple as it is.

Here’s another example:

If your annual tax payment is projected to be $2,400, $200 goes to your escrow account every month. ($2,400 divided by 12 months in a year). If your projected insurance amount is $1,200, $100 goes to escrow every month.

So if you have a $1,200 monthly mortgage payment, $900 goes toward your principle and interest, while the remaining $300 goes toward your escrow account every month.

However, at the time of your escrow analysis, let’s say that your taxes have been assessed and they have increased from the amount we thought they would be during last year’s analysis. The actual amount comes in at $3,000 for taxes and $1,600 for homeowners insurance – that’s a difference of $1,000.

TAXES: $2,400 – escrow analysis prediction

$3,000 – Actual

-$600 Difference

INSURANCE: $1,200 – escrow analysis prediction

$1,600 – actual

– $400 difference

Total shortage: -$1,000 for the tax/insurance bill.

At this point, you’re responsible for the $1,000 required to make up the total amount due for your taxes and insurance. Additionally, you’ll notice an increase in your monthly mortgage payment. The reason for this increase is to cover the newly assessed taxes and homeowners insurance.

To see a fully illustrated example of a mortgage escrow shortage, check this out.

Here are some more things to consider:

Is there a difference between an escrow shortage and an escrow deficiency? While these words may seem similar, in the world of escrow, they’re different entities. An escrow shortage occurs when there is a positive balance in the account, but there isn’t enough to pay the estimated tax and insurance for the future.

An escrow deficiency is when there’s a negative balance in your escrow account. This happens when we’ve had to advance funds to cover disbursements on your behalf. So not only are you going to be short for your upcoming tax and insurance payment, but you also owe money to bring your account current.

How often does the escrow account get analyzed? We look for changes in tax and insurance in the form of an escrow analysis once a year. However, if we see an issue that requires further examination, we can repeat an analysis to determine its impact on your payment. For example, if we’re noticing an increase in your taxes of 25% or more, or noticing a shortage over a certain amount of money, we’ll open another analysis.

How can you be proactive in managing your escrow account? Pay attention to any information you get from your city regarding tax information or from your homeowners insurance company. They will often send you information in the mail about trends and increases. This can help you plan ahead. Keep an eye on insurance trends yourself and shop around to make sure you’re getting the best rate you can. Or, set aside a savings account you deposit a set amount into as an escrow back up plan. This way if your escrow account does wind up short, you’ll have the extra funds to pay it immediately rather than roll that into your monthly payment.

Rates have nothing to do with your escrow payment. “But I have a fixed-rate mortgage! My payment is not supposed to increase.” Which is true, and it doesn’t. Remember how I suggested to view your monthly payment as two parts – a principle/interest part and the escrow part? If your rate is fixed, the amount you pay toward your principal and interest doesn’t change. The amount that does affect your monthly payment is the taxes and insurance part.

For example, using the same numbers from our example above:

10-year mortgage: $1,200 monthly mortgage payment of which $900 goes toward principle and interest, and $300 goes to escrow.

The next year, your city’s taxes increase. The new estimate states we now need $500 per month instead of $300 to cover your tax and insurance bills. This increases your monthly mortgage payment to $1,400. $900 of that amount still goes to your premium and interest. It has not changed.

But if I’m only short X amount, why am I required to pay Y? Here’s a real-world scenario: I received my escrow analysis statement and it said I’m short $1,600. The only thing that changed is that my homeowners insurance went up by $800. Why am I paying double?

Here’s the rub – the escrow account was short $800 to cover the payment for my insurance. So I’ve got a deficit of $800. The other $800 makes up the difference for the future payment of my homeowners insurance. This will get me caught up and hopefully not in a shortage situation next year. Effectively, I’m paying $800 for last year and then $800 for this year.

Did we clear up any escrow shortage questions? Let us know in the comments!

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This Post Has 127 Comments

  1. i apply for senior freeze every year,this year the county goofed up and my taxes jumped up ,well went to cty and told them and they did a certificate of error and really lowered the tax to wear it should be..which is great..all this time I informed my bank of what was going on,and not to pay the original bill that was sent them which is due 8-1-2018.They said okay we will work with you and let us know what the new bill will be when you get the cert of error..low and behold got a hold of the bank and they said well we already paid the original amount.and of course i was quite upset,all that transpiring with the bank fell on deaf ears.now i will be getting a refund from the cty for overpayment of taxes,what do i do to rectify this at the bank so my escrow payment don’t go sky high..any help would be great.

    1. Hi Elaine:

      You need to ask your mortgage servicer, the bank, to please reanalyze your escrow. Typically, this is only done once a year. However, you do have the ability to request a reanalysis. When they do the reanalysis and it shows what your taxes actually are, your escrow payment should go back down.

  2. To me it makes no sense to put monies aside for a short escrow, and then pay up front a lump sum, just to keep your mortgage payments the same as they were. That means even in a non-shortage year, you are still paying (saving instead of using your cash).

    Think about it… You are saving nothing really because you will pay it anyway, it is only a matter of when. Why would I pay an overage lump sum now when I could pay over 12 months zero interest?

    Even if I did save up in anticipation of a shortage, I could pay the extra amount monthly from my own savings, and be making interest on whatever I have left over to pay.

    It only goes to prove the saying that only death and taxes are certain.

    1. It’s true that you don’t pay extra for going month-to-month with your shortage payments. It’s really whatever works.

  3. I’ve sold my inherited house and am using the money to pay off the mortgage on our permanent residence. My husband says we are having to pay all these fees including an escrow shortage which doesn’t make sense to me. This is not my first time selling a home and the escrow balance has always been refunded. Why now are we being charged for a shortage and will that eventually be refunded?

    1. Hi Kathy:

      In the event that your property taxes and homeowners insurance were paid by your mortgage servicer for the year prior to the pay off of your mortgage, it’s possible that your homeowners insurance premiums or property taxes or both increased causing a shortage in the account. Your servicer would have gone ahead and paid the money in advance anyway, because these things have to be paid on the due date. You would have to pay back any existing shortage in the account. That would be how something like this would happen. Hope this helps!

  4. This article was well written. My question is, once the shortfall has been paid, shouldn’t the mortgage payment revert back to where it was, or at least relatively close? Our PITI payments are 1150 a month (PI is 925; TI was 225). Our credit union dropped the ball by NOT giving us an escrow analysis for the entire 8.5 years of our loan, so no increase ever came & we were novice house owners, so we didn’t know to expect any increases. Now we come to find we owe $170 more per month for the life of the loan — this is quite a chunk for us (one income family, condo living on a tight budget). I can understand why we’d owe $170 more until the deficit has been paid, but why would it remain $170/mo more for the life of the loan? That’s $2,040 more per year for another 20 years and I know property taxes and homeowners insurance doesn’t increase by that much every year in our modest circumstances (small condo). Please help! Thanks!

    1. Hi Mary:

      An escrow analysis should definitely at least be done once a year. It does sound like they really dropped the ball, but I guess there’s no helping it at this point.

      When you have a shortage, your payments are higher to both account for the amount of money that’s owed because of the shortage as well as what the new higher tax rate currently is. Once you pay off the shortage, you’re still paying at the higher tax rate because they don’t want you to have to pay off a shortage again next year, so if your taxes go up, your payment is never going down to the original amount. We’re also at a point in time where property values appear to be continuously increasing every year. The housing market does go in cycles, but there’s currently a shortage of inventory available on the market and it causes prices to go up. They’ll come back down, but no one can predict when that might happen. There’s also a trade off to values being lower because your equity is in part tied to the value of your home.

      The only good advice I can really give you is to make sure that you’re claiming every possible property tax exemption you can get and qualify for. That would help keep the tax bill down.

      Thanks,
      Kevin

  5. hello. been a home owner since 2014. 30 yr , fixed rate “conventional mortgage”. i bought when rates were rock bottom and purchased well below what i could afford ( for fear of another market crash). most people would die to have my payments, please dont take this a complaint im simply trying to understand my CU’s math. ive received my 1st shortage notice. my CU says the federal law for the lowest balance of my escrow should not exceed $300.22. i only pay taxes once per year per my city law that states if winter taxes do not exceed $1,500 then both taxes are combined to one summer bill. i had one month right after my summer taxes that i still had $320.00 left in my escrow. i now have a shortage of $25.46. is the ideal status of an escrow to be the closest to $0 ( or federal law lowest) after paying all bills? i thought you always wanted to have a balance in escrow? if i had more wouldnt that give me a refund? ive paid my shortage in full. however next month my payment will still increase $4.11 until 2/19. my CU has projected my payments out to 12/19 and my payment will dive back down in 3/19 to lower than what my payment is now. is there a way to request a the higher payment to continue on that way when it dives back down i wont have another shortage notice in 2020?

    1. Good morning, Lois:

      I’m not sure if there’s a way they would give you an artificially higher payment. What you can do is make payments directly to your escrow if you want so you can make sure you don’t run into the shortage problem. I can tell you for sure that if you end up with the balance, you do get a refund the next time your escrow is reanalyzed. Hopefully this helps!

      Thanks,
      Kevin

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