Property tax and mortgage escrow: why your payment changed

If you have a mortgage, you probably never write a check to the county for property tax. Your lender does it for you, using money it collects each month through an escrow account. That convenience has one common side effect: a letter saying your monthly payment is going up, even though your loan has not changed. In nearly every case, property tax or insurance is the reason.

How escrow works

Each month, your mortgage payment includes principal and interest plus an amount for property tax and homeowners insurance. The lender puts the tax and insurance part into an escrow account and pays the bills when they come due.

To set the monthly amount, the lender estimates the year’s tax and insurance and divides by twelve. Federal rules let it also hold a cushion of up to two months of payments, or one sixth of the year’s total, to cover small increases.

Owners with a mortgage report a typical property tax bill of $3,489 a year in the Census survey, which works out to about $290 a month in escrow for tax alone. Owners without a mortgage report $2,576, partly because people who have paid off their homes tend to have bought them long ago at lower values.

The yearly escrow analysis

Once a year, the lender reviews the account. It compares what it collected with what it actually paid, then estimates the next year. Three outcomes are possible:

• Surplus. It collected more than needed. If the surplus is $50 or more, it generally must be refunded to you.
• Shortage. The account will run below the required balance. You can usually pay it in one lump sum or spread it over the next twelve months.
• Deficiency. The account actually went negative because a bill was larger than expected. This is also repaid, often over a year.

A shortage often means two increases at once: a higher monthly amount to cover the new, larger bill, plus an extra amount to make up the past shortfall. That is why payments sometimes jump more than the tax increase alone would suggest.

Why the tax part goes up

The most common causes are:

• A reassessment. Your county revalued homes, and your assessed value rose.
• A rate or levy increase. A school district, city or county raised its rate, or voters approved a new levy.
• A lost exemption. This is very common in the first year after buying. The seller’s homestead exemption ends at sale, and if you have not filed your own, your bill can rise sharply. In California, a supplemental bill after purchase can also catch new owners by surprise.

What you can do

1. Read the escrow statement. It shows the tax amount the lender used. Compare it with your actual county bill.
2. Check your exemptions. Make sure your homestead and any senior, veteran or disability exemptions are on the county record.
3. Appeal the assessment if the county’s value looks too high. A lower value lowers future escrow.
4. Ask for a new analysis once a lower bill or new exemption takes effect, so the monthly payment comes back down sooner.

Can you drop escrow?

Some lenders let borrowers waive escrow once they have enough equity, often 20% or more, sometimes for a small fee. Loans backed by the FHA usually require escrow for the life of the loan. Without escrow, you pay the county yourself, often in one or two large installments, so you need to set the money aside.

Common questions

Why did my mortgage payment go up? Usually because property tax or insurance rose, creating an escrow shortage.

Can I pay an escrow shortage all at once? Yes, in most cases, which keeps the monthly increase smaller.

Who pays if the lender misses the tax bill? Lenders that manage escrow are responsible for paying on time. If a penalty results from their error, they generally must cover it.