Having a fixed-rate mortgage offers protection against future increases in mortgage interest rates. Specifically, a fixed-rate mortgage means that the principal and interest portion of your monthly payment will remain the same, though the allocation between them will adjust as the loan matures. (You can see how this works on mortgage calculators, as found on Bankrate and other financial websites.)

But this doesn’t mean your overall monthly payment can’t go up. If you have an FHA, VA or USDA mortgage, an escrow account for the payment of property taxes and homeowner’s insurance is required. If your property tax bill goes up, and/or your homeowner’s insurance premium rises, the escrow portion of your monthly mortgage payment will increase. If these expenses rise year-over-year, the escrow portion of your mortgage payment will be rising to catch up.

Ohio homebuyers and homeowners need to know that escrow accounts can also require a “reserve.” Mortgage servicers are allowed by law to hold 2 months worth of escrow deposits as a cushion against future increases in taxes and insurance. However, since the 2-month reserve also has to be maintained, increases in taxes and insurance can mean 14-months worth of escrow deposit catch-up.

For example: If you have annual property taxes of $4,800 and an annual homeowner’s insurance premium of $950, These two items would total $5,750 per year. Your monthly escrow would be based on $5,750 divided by 12 months = $479.16 per month. This $479.16 would be added to your principal and interest payment, to create your total monthly mortgage payment.

But if your tax bill comes in at $5,100 and your insurance premium changed to $1,200, your mortgage servicer will pay these bills anyway – but then collect the difference from you. This is a one-two punch, because they need to make up the shortfall for the current year, and collect at least these amounts for next year. Also, if there is an escrow reserve, it needs to be increased to match the new monthly deposits.

It would look something like this:

Taxes: $4,800 collected, $5,100 paid = $300 shortage

Insurance: $950 collected, $1,200 paid = $250 shortage

New escrow payment:

Total annual tax and insurance payments: $6,300 per year = $525.00 new monthly escrow deposit

Total shortage $550. Divided by 12 = $45.83 per month shortage recovery

Total new monthly escrow payment $570.83.

If an escrow reserve is held, your servicer will also collect 2 months of the difference between the old escrow deposit ($479.16) and your new base escrow deposit ($525.00), which is $45.84.

So, $45.84 x 2 = $91.68. This would be divided by 12, to collect over 12 months with the rest of the escrow deposits, becoming another $7.64 on your monthly escrow payment. The grand total for your monthly escrow deposit would now be $578.43.

As an option, you can elect to pay off an escrow shortage in a lump sum, rather than have it prorated over a 12-month period.

Mortgage servicers analyze, or reconcile, your escrow account each year. Escrow overages can happen too, and if your tax and insurance payments come in lower than expected, you may receive an escrow refund for the difference.

Always check your mortgage statements, and watch your tax and insurance bills, too! If you have questions about the handling of your escrow account, reach out to your servicer promptly.

As Exclusive Buyer’s Brokers, we serve your best interests at all times! Unlike real estate agents and brokerages who represent sellers, as an Exclusive Buyer’s Broker, we only represent you, the buyer, getting you the best price and terms with no conflict of interest, at all times.

Understanding this distinction could literally save you thousands of dollars not only on the purchase price and terms, but also on seller concessions and home inspection issues, whether you are a first-time homebuyer or an experienced homeowner!

Contact us with your home buying questions! Remember, we are with you every step of the way…all the way home!

Andrew Show
Exclusive Buyer’s Broker, CEBA-M, MCNE, CSP, PSA,e-PRO, CREM, ABRM, AHWD
Buyer’s Resource Realty Services www.BuyersHome.com
Serving Metro Columbus, Ohio with Exclusive Buyer’s Agents
7100 North High Street, Suite 204, Worthington, Ohio 43085
614-888-4110 | 888-888-4110 Toll Free | 614-839-4110 Fax