Mortgage Escrow: How Does It Work
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It looks like one of our bills will be increasing starting this month. Imagine the joy on our faces when we got an update from Wells Fargo about our mortgage payments for the next year. It looks like we're having an increase.
Having a fixed rate mortgage doesn't necessarily mean that our payments to Wells Fargo remain the same through out the loan. Why? Besides sending in the mortgage payment, we're also sending in money to escrow.
What is Escrow? How Does It Work?
When you get a mortgage, if your down payment is less than 20% your lender will typically have you open an escrow account to handle your property taxes and homeowner's insurance.
This amount is estimated and then broken down into monthly payments, added to your mortgage payments. In addition to those bills, our escrow also takes care of our mortgage insurance premium (MIP) that we owe as we got an FHA loan on the house. Instead of cutting checks to several places, Wells Fargo makes these payments on our behalf as they are due.
The disadvantage of not doing this ourselves is that we don't earn any interest on the money as it's being saved. However looking at the balance it's not really a huge deal.
Perhaps down the line, we may want to take care of those bills ourselves and get a small bump in our savings. For now, though, Wells Fargo is handling it.
Looking at Our Mortgage Escrow
After reviewing the changes, I noticed that the increase is due to a slight increase in our property tax bill and the new premiums for our home insurance.
As you may remember, we were reevaluating our home insurance coverage to make sure we were getting a good deal and found that we were under-insured for our house should a fire happen. The insurance wouldn't be enough to cover the interior rebuild.
The total increase for our escrow account portion would be around 12%. Wells Fargo is giving us two options:
- Pay the shortage now and our mortgage payment goes up.
- Spread the additional payments out through the year.
So either way, our mortgage increases. To keep our cash flow steady we went with the latter option and I already adjusted our bill pay service to the new amount.
Thoughts on Mortgage Payments
I'd like to hear from you about how your mortgage payments are going? How frequently have your payments changed through the years? How big or small are the changes?
My mortgage payment itself will always stay the same but as you mentioned the amount to escrow will change from year to year. My payment went down a few dollars at the last adjustment but I’m guessing it’ll go up next time.
Last year our payments went down by a little bit, which was nice. I’m hoping next year we’ll see a drop.
can you refi once your equity is more than 20% to avoid all escrow? we pay everything ourselves. last year I challenged the increase in our property taxes and actually got a refund and lower numbers this year!
I’m hoping that we’ll reach that milestone some time this year. It would be great if we can get our property taxes lowered.
The escrow on two home I own both went up, couple that with a drop in take home pay from the 2% increase in FICA and I had to sit down and redo my budget. It was a bit painful as I had to reduce how much I was allocating for debt reduction. I’m in the process of re-financing one of the homes and hopefully that will bring me back to par on a monthly basis.
I hope the refinance goes smoothly Jose!