33 - The Mystery of Escrow: Why Did My Payment Change?

 Why did your monthly mortgage payment suddenly go up? In this episode of "Making Sense of Your Cents," Daniel and Shanna demystify the escrow account. We explain the difference between a fixed-rate mortgage and a fixed monthly payment, break down the "Annual Escrow Analysis," and explain the mandatory account "cushion" required by federal regulations. We also detail the mechanics of the "Life of a Payment" and how escrow shortages are calculated. Plus, we answer common community questions about opting out of escrow and how to handle shortages, and give you an actionable, simple step to review your property tax assessment before your next payment adjustment. Tune in to take the mystery out of your mortgage and regain control of your homeownership budget! 

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Transcript

Shanna Browning 0:03

So Daniel had a customer come in yesterday so frustrated, been in a home for three years, and she's got a fixed rate mortgage, but her payment jumped over $100.

Daniel Hill 0:15

Oh my goodness. Wow. Yep. That is the dreaded escrow surprise.

Shanna Browning 0:21

Ooh for that.

Daniel Hill 0:22

It's probably the single most common phone call that we get.

Shanna Browning 0:28

Yep. And she said, I thought a fixed-rate mortgage meant my payment was locked in until that house was paid off. And she's not wrong. She felt like we as a bank had just randomly decided to charge her more. That's not how that works, but let's talk about that.

Daniel Hill 0:42

But you know, it's so easy to see why she would feel that way. To the average homeowner, that monthly bill just says mortgage payment. It doesn't break down all the moving parts that go on underneath.

Shanna Browning 0:58

And there's always moving parts. And it's like a car payment, you know, where your insurance and the gas are suddenly added in without any warning. So today we're going to demystify the escrow account. We're going to explain why your payment can change even when your interest rate is locked in. And more importantly, how you could stay ahead of those adjustments so you aren't caught off guard.

Daniel Hill 1:28

Welcome back to Making Sense of Your Sense. I'm Daniel Hill.

Shanna Browning 1:32

And hello, friends. I'm Shanna Browning. And so, hey, here we are. We're moving into the month of June. And today we're going to tackle a topic that really strikes at the heart of ownership, and that's the escrow account.

Daniel Hill 1:47

If you own a home, and I'm going to say this, especially in Knox County, you've likely seen your payment shift. Today we're going to break down the why so you can stop guessing and start budgeting with confidence.

Shanna Browning 2:03

So I really think we need to back up just a second. And so let's start with the basics, right?

Daniel Hill 2:08

Yes.

Shanna Browning 2:09

Most people see one lump sum hitting their account every month. So what's inside that escrow bucket?

Daniel Hill 2:15

Well, if you think of your escrow bucket as a holding tank for your property-related bills, when you make your monthly payment, you aren't just paying the bank for the loan. You're also paying for your property taxes, your homeowner's insurance, you know, all the things that would go with owning a home.

Shanna Browning 2:38

That's correct. And so sometimes what that's called, just um let me say here real quick, it's sometimes called P I T I.

Daniel Hill 2:45

Yes. And we talked about that in one of our episodes.

Shanna Browning 2:48

That is correct. And so the bank, we are going to collect a portion of those bills every month. And we hold it into that special account, and then it pays the tax guy who we all love.

Daniel Hill 2:58

Oh, yeah.

Shanna Browning 2:59

And the insurance company on behalf of you for when those bills come due.

Daniel Hill 3:04

So what you're saying is it's actually a convenience.

Shanna Browning 3:08

It is. That's right.

Daniel Hill 3:10

It prevents you from having to come up with a $2,000 tax bill all at once in December. But here's where the problem is taxes and insurance premiums aren't fixed.

Shanna Browning 3:24

That's right. Only your monthly payment. That is correct. And that's, I think that's the crux and the misunderstanding sometimes of what that issue is. The mortgage interest rate is fixed, but the costs inside that escrow bucket are completely tied to the market, just like you mentioned. So if the county, Knox County, Union County, Clayburn County, all these counties that we're in, if your county raises property taxes, your escrow is going up.

Daniel Hill 3:53

Right.

Shanna Browning 3:53

And that requirement changes things. So if your insurance company raises your premium, that's also going to flow through your escrow. So your escrow account exists to ensure those priority liens, your taxes and your insurance are always paid, which protects both you and the bank's investment.

Daniel Hill 4:14

Exactly. And like I mentioned, it saves you from having to come up with $2,000 all at once. You're putting away a little bit towards that every month.

Shanna Browning 4:25

That's correct. And I think that's where a lot of that confusion happens. When someone signs those closing papers, they hear fixed rate, which in our brains covers over to fixed payment.

Daniel Hill 4:39

That's the disconnect. Your interest rate is locked in for the life of the loan. That's correct. That's the part the bank controls. But the property tax rate, that's local government. The insurance premium, that's your insurance carrier.

Shanna Browning 4:56

Of course. And those entities really don't care about your mortgage contract. No. They do not. They care about their insurance and they care about their taxes. So if the cost of the building materials goes up, your homeowner's insurance policy is going to likely increase because it's the replacement cost of your home.

Daniel Hill 5:14

Right. And if your local school board or city council decides they need more revenue, what? They increase your property tax millage rate. Neither of those events is tied to your mortgage, but both affect the total check you write to the bank every month. It's important for homeowners to realize that fixed part of their mortgage only covers the principal and interest, not the taxes and insurance components.

Shanna Browning 5:42

That's correct. So let's walk through the life of a payment. Okay. If it says, if sorry, excuse me, if I pay $1,500 a month, how much of that is working for me behind the scenes?

Daniel Hill 6:54

I need to know. That is a great question. Every time that check hits our desk, the system automatically splits it. A portion goes to interest, a portion to principal, and a portion goes into your escrow sub account. It sits there accruing until the county or your insurance company sends the bill.

Shanna Browning 7:15

Which typically is once a year, right? So and then the annual escrow analysis happens. This is the audit we perform. We look at the actual bills that we paid for you last year and we compare them to what we estimated we would pay.

Daniel Hill 7:34

And if we estimated that your taxes would be twelve hundred dollars, but they ended up being $1,400, your escrow balance is now lower than it needs to be. This creates a shortage.

Shanna Browning 7:48

Yep.

Daniel Hill 7:49

When the new year starts, we have to collect your new higher taxes, plus make up for that $200 shortage from last year. That's why the monthly payment jump feels so severe.

Shanna Browning 8:01

And it does feel severe. Sometimes it's hard. And there's also that cushion we have to talk about. Regulations, specifically RESPA, actually require us as a banking institution to keep a little bit of extra money in that account at all times. It's essentially a safety net so that if your insurance goes up unexpectedly, we don't actually or accidentally bounce a payment to your insurer. We don't want to do that on your behalf.

Daniel Hill 8:32

No, not at all. So now we want to look at a couple questions that we hear across our branches regarding these fluctuations. So, Shanna, what's a big one that you've heard lately?

Shanna Browning 8:46

Well, I think in just being out in the community and and or within a you know a branch that somebody comes into, the most common one that we're hearing is can I opt out of escrow and just pay my own taxes and insurance? That's you know, that's a great question.

Daniel Hill 9:01

Um and the answer to that is maybe. Maybe, maybe, and it really depends on your loan-to-value ratio. If you have a significant equity in your home, many lenders will allow you to manage your own taxes and insurance. But, and this is a very big but, yeah, you have to be disciplined. If you forget that tax bill, the county doesn't care about your quote unquote system. They will put a lien on your house.

Shanna Browning 9:34

Yeah. Or we're sorry you forgot. You're gonna have to make that payment, right? And so another question is what happens if I get an escrow shortage, like you just talked about, but I don't want my monthly payment to go up.

Daniel Hill 9:47

Well, in many cases, if you receive an analysis showing a shortage, the bank will allow you to send a one-time lump sum payment to cover that deficit. If you pay that shortage in full, your monthly payment will only increase by the amount of the new tax and insurance premiums rather than the premium plus the shortage payback. It's a great way to keep your monthly budget stable if you have the cash on hand. And that's a big if you have the cash on hand.

Shanna Browning 10:20

That's right. That's exactly right.

Daniel Hill 10:22

Now, I know this has been a lot to process. Escrow is not one of those Tuesday morning coffee shops. Sorry, Chris, it hanger. This is not one of those conversations you want to have. Yeah. But I think it's very good information. And so we're gonna keep our action item this week very simple.

Shanna Browning 10:47

So our action tip for this week for you all is the assessment review.

Daniel Hill 10:54

So much fun.

Shanna Browning 10:55

Oh just yeah. But we gotta do it.

Daniel Hill 10:59

Your property tax assessment that arrives usually in the mail. Don't just throw it in a drawer. Yeah, yeah. Out of sight, out of mind is not the best scenario in this case. Look at it. Check the data. Does it reflect the actual square footage of your home? Does it account for the condition of the property? These are very important things to look at.

Shanna Browning 11:21

That's right. And so I I want our listeners to hear us say if something looks off to you, then you call your tax assessor's office. You have every right as the owner of that home to know what's going on. So you make sure you call your local tax assessor because you need to find out what's going on with that. And if you find an error or if you want to appeal it, whatever you want to do, getting it fixed now is the best way to prevent that from happening again later in the year.

Daniel Hill 11:52

Right, right.

Shanna Browning 11:53

So this is a great one, right? I mean, this is a really good one to talk about. And it's the part of ownership, uh, home ownership. So it's all about taking that surprise out of your monthly budget.

Daniel Hill 12:05

Yeah. Next week, we're moving from the home to the suitcase.

Shanna Browning 12:11

Let's do it.

Daniel Hill 12:12

Not because you're getting evicted, but because we're doing a deep dive into vacation planning, traveling without debt.

Shanna Browning 12:19

Wow, I like it. And you don't want to miss it. So let's subscribe now so it's in your feed next Tuesday.

Daniel Hill 12:26

Thank you for being a part of our community. Now go out, make some sense of your sense.

Shanna Browning 12:31

And own your home.