Can Escrow Amounts Increase Due to Insurance?

If you have a mortgage, chances are you also have an escrow account. Even if you have a fixed-rate mortgage, having an escrow account can cause your monthly payments to change periodically. In most cases, a change in your monthly escrow payments indicates that there has been a change in your home insurance or property tax estimates.

To calculate your monthly escrow payment, you lender determines an estimate of your property taxes and home insurance. If the lender requires you to keep a cushion in your account, he may factor that amount into the calculation as well. Once he determines your total expected liability for the year, he divides it by 12 to calculate your payment. Most lenders recalculate escrow payments each year.

If your insurance for the year increases, your escrow payments will increase as well. After the lender receives the new amount from your insurance company, he will recalculate your payment for the next year to reflect the change. Conversely, if your insurance payment decreases, your monthly mortgage payment will decrease. Your escrow payment will also increase or decrease to reflect changes in your property tax bills.

Under the Real Estate Settlement Procedures Act, lenders can keep a cushion in your escrow account, but the cushion can't be more than one-sixth of your total liability for the year when your account reaches its lowest point. If the cushion in your account exceeds this amount, RESPA requires your lender to refund the difference. However, if your insurance bill increases, the amount the lender can legally keep in your account as a cushion will increase as well.

Most lenders only recalculate escrow payments once per year, so if your insurance costs increase in the middle of the year, your escrow payment won't change until the lender recalculates it. If the lender had to make any insurance payments out of his own funds because of a mid-year change in insurance costs, he will add the amount he paid to your liability for the next year.

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