When people obtain a mortgage loan, it is very common for them to choose to include their homeowner's insurance and property taxes in the mortgage payment. If a homeowner's taxes or insurance payments increase during the year, the mortgage company will still pay the amount due, even though there isn't enough money in the escrow account to cover the full cost of the charges. This causes the homeowner's escrow account to show a negative balance.
About Escrow Accounts
When you include insurance and property tax costs in your mortgage payment, you make one monthly payment to your lender. The lender applies the principal and interest portion of the payment to your mortgage loan monthly. Since property taxes and homeowner's insurance are typically due once per year, the lender holds those portions of your monthly payment in escrow. Your mortgage company makes the payments directly to your insurance company and local taxing agency to which those payments are due. If there isn't enough money in the account, this causes a negative balance or a shortage. Your lender still pays the amounts due, but you will have to pay the shortage back to your lender.
Assessed Property Values
When you first obtain your mortgage, your lender estimates your yearly property taxes based on the tax history and assessed value of your property. If the assessed value of your property increases, it causes an increase in your property taxes. This is because the value of your property determines how much you pay for property taxes. Your mortgage company pays the increased property tax bill. When the lender makes the payment, you will have a negative balance or shortage in your escrow account.
Millage Taxes
Cities and towns often vote on millage rate increases to help pay for the costs or expansion of public departments, such as police, fire, road commissions and public utilities. When a millage rate passes, it means that your property taxes will increase at the millage rate for every $1,000 of your property value. Your mortgage company will pay the tax increase, causing your escrow account balance to go in the negative. For example, your town votes to approve a 20-mill increase. Since the mill is the rate per $1,000 of property value, you divide 20 by 1,000 to get the millage rate. This equals .02. The assessed value of you property is $100,000. A 20-mill increase means that your property taxes will increase by $2,000 (.02 x 100,000 = 2,000) per year.
Homeowner's Insurance
The price of your homeowner's insurance premium typically increases if you make a claim against your policy, increase your coverage to include additional items not included on the original policy or if your insurance company simply decides to increase your rates. When this happens, once again, your mortgage company will pay the increased policy costs, causing your escrow account to have a negative balance.
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