How To Avoid Escrow Shortage
Avoiding an escrow shortage—when your escrow account lacks enough funds to cover property taxes or insurance—requires a proactive approach to managing your mortgage and home-related expenses. Here’s how to prevent it:
1. Understand How Escrow Works
- Your escrow account collects part of your monthly mortgage payment to pay for property taxes, homeowners insurance, and sometimes mortgage insurance.
- The lender estimates future costs, but actual bills can change, creating shortages or overages.
2. Monitor Property Tax and Insurance Rates
- Track annual changes in your property taxes (often based on assessed home value) and insurance premiums.
- Appeal property assessments if they seem inflated to potentially reduce tax bills.
3. Review Your Annual Escrow Statement
- Your lender sends this yearly. Check:
- Whether taxes or insurance increased
- If the escrow balance fell below the required minimum (usually 2 months’ cushion)
- Catching increases early can help you prepare or adjust payments.
4. Make Voluntary Escrow Contributions
- If you anticipate a shortfall, you can add extra money to your escrow to avoid a big adjustment later.
- Some lenders allow you to make lump-sum payments to cover shortages and keep your monthly mortgage stable.
5. Shop Around for Insurance
- Compare rates annually to avoid steep increases.
- Increasing deductibles or bundling policies can help reduce premiums.
6. Budget for Escrow Changes
- Set aside some savings in case your monthly mortgage payment increases due to escrow adjustments.
- Treat escrow as a dynamic expense—not a fixed one.
7. Communicate With Your Lender
- If you expect changes in taxes or insurance, inform your lender in advance.
- Ask how they handle escrow adjustments and whether you can pay shortages upfront.