Dexter Bayer, contributing editor
I have excellent credit. I make over $80,000/year. I have no debt (other than my mortgage) and am diligent about managing my finances. Despite doing all the right things, I’m having a hard time paying my mortgage loan. Let me explain how this happens.
Many of you may not be familiar with how a mortgage escrow account works. Escrow accounts are like savings accounts for homeowners. Depending upon your mortgage lender and which type of loan product you have, you may or may not be required to have an escrow account. Any money that is deposited into the account is used to pay property taxes and homeowner's insurance.
In most cases, escrow deposits are made on a monthly basis as part of your regular mortgage payment. Your lending institution then becomes responsible for making payments for your homeowner’s insurance and property taxes on or prior to the due date. The amount of initial escrow deposit and ongoing monthly payment into the escrow is determined by the cost of insurance and the tax assessment of your property. This amount can fluctuate year to year as premiums rise and further adjustments are made.
Quick example: Let’s say your lending institution requires that you have $2000 in your escrow account. Each month, $500 is deducted from the account to pay for property taxes and insurance, and each month you pay another $500 in to the account (take a look at your mortgage statement and you can see how much of your mortgage payment is for the actual loan, and how much is for the escrow.)
Herein lies the rub. As a general rule, lenders will only make a single annual assessment to modify your escrow payment. So what happens if your homeowner’s insurance increases by $250 a month in March, but the assessment isn’t made until December? Let’s do the math.
Rest assured (sarcastic) your lender will be contacting you around August to let you know that, not only has your homeowner’s insurance increased by $250/month, but you are now going to have to pay an additional $250/month in order to re-establish your escrow account to the required $2000 balance over the subsequent 12-month period of time. My mortgage payment is now $1950/month as opposed to the $1450 I’ve budgeted for.
In an industry which is inappropriately referred to as “Financial Services”, there is a tremendous opportunity for one, or several of the major lending institutions to put servicing borrower’s first. No system should be tolerated which puts responsible borrowers at a financial disadvantage. It would be a simple process for lenders to implement a monthly escrow reconciliation (or quarterly at least!) to better assist borrowers in managing adjustments in their required monthly mortgage or escrow payments. I don’t know many homeowners who can afford an increase of 25% in their monthly mortgage contributions, particularly with rising health insurance costs, which is another rant altogether.
