Escrow funds are placed on deposit with an escrow agent for expenses associated with real property such as property tax and insurance. An increase in property tax or homeowner’s insurance premiums will cause a corresponding increase in escrow.
Unless a homeowner pays the amount due for property tax and insurance into escrow up front, the total escrow amount divides by 12 and adds to the mortgage payment. Most lenders revalue escrow amounts annually on the anniversary date of the mortgage, and will increase the monthly escrow amount if the property tax or insurance premiums increased in the prior year.
Property tax is always rising and very rarely goes down. If real estate value increases or other government services add to the millage rate, then the amount of property tax assessed will increase. Property tax increases result in increased escrow payments. Alternatively, if real estate value has declined significantly, the homeowner has the right to request the city or county assessing the tax to reassess the property value.
A new homeowner’s insurance policy will contain many discounts, such as a discount for a new home. Over time these discounts will decrease, and the premiums for insurance will increase. Many insurance companies also increase the value of the property insured based on market conditions, which will create a corresponding increase in premiums. These higher insurance premiums increase escrow payments.
How to Estimate Escrow
Escrow amounts are easy to estimate. Obtain the amount of all property taxes paid by escrow the prior year, the last homeowner’s insurance premium paid and any additional items that are subject to escrow like flood insurance or private mortgage insurance. Total the items and divide by 12, which will give an estimate of escrow payments.