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Escrow Shortage

If you have a mortgage on your home, your total house payment may include 1/12 the cost of the annual taxes and insurance.  Those amounts are held in an escrow account so the lender can pay them when they become due.

The most common reason an escrow account shortage occurs is that taxes and insurance premiums increase, and the amount being collected isn’t enough to pay them when they become due.

As an example, let’s say the taxes increased and there was a $600 shortage.  The lender will probably give the borrower the option to pay the $600 in cash or adjust the payment to cover the shortage.  If the borrower chooses the increased payment, it will be increased not only $50 to cover the shortage from last year but another $50 a month to pay the increased amount for the coming year.

Regardless of which option the borrower takes, their payment will increase.  If they pay the shortage in cash, the payment still must go up to cover the increased taxes for the next year.

Lenders will perform an escrow analysis annually to determine if there will be enough funds to pay the taxes and insurance.  Even though the lender is paying these bills on your behalf, the tax authorities and insurance agent will notify you what is going to happen.  You’ll usually find out much sooner than the lender knows but not recognize that it will affect your payment.

A fixed-rate mortgage determines the principal and interest portion of the payment for the term of the loan.  The property taxes and insurance are variables that contribute to the total payment which will make the house payment change over the years.

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