Your mortgage payment went up and the rate did not change: escrow, taxes and what to do

Your rate did not change. Your escrow did.

If you have a fixed-rate mortgage and your payment went up, the cause is almost always your escrow account, the part of each payment your servicer sets aside to pay property taxes and homeowners insurance. When those bills rise, the servicer raises your monthly escrow amount to match, and if the account came up short last year it may also collect the shortage. In Texas the first full year after a purchase is a common time for this, because the tax bill often changes once the county reassesses the home and the previous owner's exemptions fall away.

This is one of the most common calls I get from past clients around Dallas, usually a year or so after closing. The good news is that part of the increase may be within your control. The rest at least becomes predictable once you understand it.

How an escrow account works

The CFPB describes an escrow account as one set up by your mortgage lender to pay certain property-related expenses. Part of every monthly payment goes into it, and the servicer uses that money to pay your property taxes and insurance when they come due. Many lenders require escrow, and the CFPB notes that because taxes and insurance premiums can change from year to year, your escrow payment, and with it your total monthly payment, will change accordingly.

Servicers review escrow accounts periodically, usually once a year, comparing what they collected with what they actually paid out and what they expect to pay next year. You will receive an escrow statement showing that analysis. If the account collected more than it needed, you may see a refund or a lower payment. If it collected less, you will see a shortage and a higher payment.

• Principal and interest: fixed for the life of a fixed-rate loan
• Property taxes: set by local taxing units and the appraisal district
• Homeowners insurance: set by your insurer at each renewal
• Mortgage insurance, if any: set by the loan terms
• Shortage repayment: added when last year's escrow fell short

Why the first year in a Texas home often brings a jump

At closing, your escrow is estimated from the best information available, often the prior year's tax bill. That bill may reflect the previous owner's exemptions and an older appraised value. Once the appraisal district updates the value and the exemptions change hands, the actual bill can be meaningfully higher than the estimate, and the first escrow analysis catches up.

New construction is an even bigger example. A home completed partway through a year may have been taxed on the land or a partial value at closing, and the first full assessment of the finished house can raise the tax bill sharply. If you bought a newly built home, expect the escrow to adjust and plan for it rather than being surprised.

If you are still under contract, ask your loan officer how the escrow estimate was built and whether it reflects the previous owner's exemptions or an old value. If it does, set aside a little extra each month after closing, so the first escrow analysis becomes a planned adjustment rather than a shock to the budget.

File your homestead exemption, if you have not already

If the home is your principal residence, the residence homestead exemption is the most important step you can take on property taxes. The Texas Comptroller states that school districts must provide a $140,000 exemption on a residence homestead, and taxing units may offer an additional local option exemption. Homeowners who are 65 or older can qualify for more; the Comptroller lists an additional $60,000 school district exemption for them.

You apply with the appraisal district in the county where the property is located, using the Comptroller's Form 50-114. The Comptroller lists the general deadline as before May 1. If you bought after January 1, you may receive the exemption for the applicable portion of that year, as long as the previous owner did not receive the same exemption for that tax year. Many new owners assume the title company or the lender files it. Check that yours is on file with your appraisal district.

• Confirm the property is your principal residence
• Download or request Form 50-114 from your county appraisal district
• Submit it with the required identification
• Check the appraisal district's website later to confirm it was applied
• Send your servicer the updated tax information if it lowers the bill

Look at the appraised value, too

Texas appraisal districts, including the ones serving Dallas and the surrounding counties, send notices of appraised value, and homeowners have the right to protest a value they believe is too high. If your notice seems out of line with what similar homes sold for, a protest can be worth the time. Many homeowners handle it themselves; others hire a property tax consultant. Either way, read your notice when it arrives rather than letting the deadline pass.

A lower appraised value does not change your mortgage, but it can lower the tax bill, which flows straight through to your escrow and your monthly payment.

Insurance is the other half

Homeowners insurance premiums are set by the insurer, not the lender, and they can change at every renewal. If your escrow jumped and taxes did not, look at the insurance renewal. A property and casualty agent explains the options well in what to do when a homeowners renewal jumps.

If you shop and switch insurers, let your servicer know right away and send the new declarations page. Otherwise the servicer may pay the old premium from escrow, or worse, place its own coverage on the property if it believes your policy lapsed. Keep the mortgagee clause correct on the new policy so the servicer is listed properly.

When you compare quotes, compare the same coverage, deductibles and endorsements, not just the premium. A cheaper policy with a much higher wind and hail deductible can cost far more the first time a storm comes through.

Reading the escrow statement line by line

The escrow statement looks dense, but it answers three questions. What did the servicer collect and pay last year? What does it expect to pay next year? And is the account short, balanced or over? Work through it in that order and the reason for the new payment usually becomes clear within a few minutes.

If something looks wrong, call the servicer and ask. Errors happen: a tax bill paid twice, an insurance premium from a policy you canceled, or an exemption that was granted after the servicer ran its estimate. Ask the servicer to run a new analysis once the correct figures are in, and keep copies of what you send.

• Compare last year's actual tax and insurance payments with what was projected
• Check that the property tax figure matches your current bill, including exemptions
• Confirm the insurance premium matches your current policy
• Note the cushion the servicer holds and whether there is a shortage or surplus
• Separate the one-time shortage repayment from the new ongoing escrow amount

Paying a shortage: lump sum or spread out

When an escrow analysis shows a shortage, servicers typically give you a choice: pay it in one lump sum, or let it be spread across the coming year's payments. Paying it in full removes the shortage portion from your new payment, though the higher ongoing escrow amount for this year's taxes and insurance remains. Spreading it out keeps cash in your pocket now but makes each payment higher until it is repaid.

Neither is wrong. Pick the option that fits your budget, and read the statement carefully to understand which part of the increase is a one-time catch-up and which part is the new normal.

Mortgage insurance: the part that can go away

If you put less than 20 percent down on a conventional loan, part of your payment is private mortgage insurance, and that part does not have to last forever. The CFPB explains that you can ask your servicer to cancel it once your balance is scheduled to fall to 80 percent of the home's original value, provided you request it in writing, have a good payment history, have no junior liens and can show the value has not declined. The servicer generally must end it automatically when the balance is scheduled to reach 78 percent, if you are current.

FHA mortgage insurance follows different rules. If you have an FHA loan and have built meaningful equity, a refinance into a conventional loan may remove mortgage insurance; my comparison of FHA, conventional and VA loans explains the differences. Whether a refinance is worth it depends on the numbers, which I walk through in how to tell if refinancing makes sense.

A yearly routine for the years ahead

A few minutes once a year keeps escrow surprises small. Read your escrow statement when it arrives. Check your appraisal notice in the spring and confirm your exemptions are applied. Review your insurance renewal before it is paid from escrow. And keep an eye on your loan balance compared with your home's value if you are paying mortgage insurance.

At First United Bank, loan servicing stays in-house after closing, so the people who made your loan are the people you call with escrow questions. I am happy to look at a statement with a past client and explain what changed. For anything about your tax bill itself, your county appraisal district or a property tax professional is the right resource, and for insurance, your agent. This is general information, not tax or legal advice; talk to a licensed professional about your specific situation.

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