Escrow Shortage: Why Your Payment Increased and What to Do

An escrow shortage occurs when your escrow account doesn’t have enough funds to pay your property taxes or insurance when they come due. This typically happens when taxes or insurance premiums increase. Your servicer will notify you of the shortage and increase your monthly payment to cover it. You can pay the shortage as a lump sum to avoid the payment increase, or spread it over 12 months with higher payments.

What Causes Escrow Shortages

Primary Causes

Property tax increases:

• Reassessment after purchase
• Annual tax rate increases
• Loss of exemptions
• Value increases

Insurance premium increases:

• Policy renewal at higher rate
• Coverage changes
• Claims history
• Market-wide increases

Initial underestimation:

• Escrow set up incorrectly
• Taxes estimated too low
• Insurance costs underestimated

How It Happens

Example:

• Your escrow collects $400/month for taxes and insurance
• Annual collection: $4,800
• Actual annual costs: $5,400
• Shortage: $600

Now your account doesn’t have enough to pay the bills.

Escrow Account Basics

What Escrow Covers

Expense	Paid From Escrow
Property taxes	Yes
Homeowners insurance	Yes
Flood insurance	If required
PMI/MIP	Sometimes
HOA fees	Rarely

How Escrow Works

1. You pay monthly escrow amount with mortgage
2. Servicer holds funds in escrow account
3. When bills are due, servicer pays them
4. Servicer analyzes account annually
5. Adjusts payment if needed

The Cushion

Servicers can require a cushion (reserve):

• Up to 2 months of escrow payments
• Protects against unexpected increases
• Part of your escrow balance

Annual Escrow Analysis

What It Is

Your servicer reviews your escrow account annually:

• Calculates upcoming tax and insurance costs
• Compares to current escrow collection
• Identifies shortage, surplus or adequate balance
• Adjusts monthly payment accordingly

When You Receive It

Typically:

• Same time each year
• 30+ days before any payment change
• Includes detailed breakdown

What the Statement Shows

Item	Information
Current balance	What’s in your account now
Projected disbursements	Expected tax and insurance payments
Projected deposits	Your upcoming escrow payments
Shortage/surplus	Difference between need and have
New payment amount	Your adjusted monthly payment

Understanding Your Escrow Statement

Reading the Numbers

Current escrow balance: What’s in the account today

Minimum required balance: What servicer needs to maintain (including cushion)

Projected low point: When account will be at its lowest

Shortage amount: How much you’re short

New monthly escrow: Your new escrow portion

Sample Calculation

Current situation:

• Escrow balance: $1,200
• Taxes due: $3,600 (annual)
• Insurance due: $1,800 (annual)
• Total annual: $5,400
• Current monthly collection: $425

Problem:

• $425 × 12 = $5,100 collected
• $5,400 needed
• Shortage: $300

Plus cushion requirement:

• 2-month cushion: $900
• Total shortage: $300 + $900 = $1,200

Your Options for Handling Shortage

Option 1: Pay Lump Sum

Pay the shortage in full:

• Write a check for shortage amount
• Monthly payment still increases (for ongoing costs)
• But avoids spreading shortage over 12 months

Example:

• Shortage: $1,200
• Pay $1,200 now
• Payment increase is just for ongoing higher costs

Option 2: Spread Over 12 Months

Default option:

• Shortage divided by 12
• Added to monthly payment
• Higher payment for one year
• Then reassessed

Example:

• Shortage: $1,200
• $1,200 ÷ 12 = $100/month added
• Plus increased escrow for ongoing costs

Option 3: Spread Over Longer Period

Some servicers allow:

• Extend to 24 months
• Lower monthly increase
• Ask servicer about options

Option 4: Partial Lump Sum

Combination approach:

• Pay part as lump sum
• Spread remaining over 12 months
• Reduces monthly increase

Why Payment Increases More Than Expected

Multiple Factors Combine

Your payment increase includes:

1. Shortage repayment (catching up)
2. Increased ongoing escrow (for higher costs)
3. Cushion adjustment (if required)

Example Breakdown

Current payment: $2,500 New payment: $2,750 Increase: $250

Component	Amount
Shortage repayment	$100/month
Higher taxes	$75/month
Higher insurance	$50/month
Cushion adjustment	$25/month
Total increase	$250/month

Preventing Future Shortages

Monitor Tax Assessments

Watch for:

• Reassessment notices
• Tax rate changes
• Exemption changes
• Value increases

Take action:

• Appeal if assessment seems wrong
• Apply for exemptions you qualify for
• Budget for increases

Review Insurance Annually

Before renewal:

• Shop for better rates
• Review coverage needs
• Ask about discounts
• Compare policies

Potential savings:

• Bundling discounts
• Security system discounts
• Claims-free discounts
• Higher deductible (lower premium)

Track Your Escrow

Regularly check:

• Account balance
• Disbursement dates
• Payment amounts
• Annual analysis

Escrow Surplus

What It Is

The opposite of shortage—you have more than needed:

• Taxes or insurance decreased
• Initial estimate was too high
• Overpayment accumulated

What Happens

If surplus exceeds $50:

• Servicer must refund you
• Check mailed within 30 days
• Monthly payment may decrease

Using a Surplus

You can:

• Receive refund check
• Apply to principal
• Keep as extra cushion (request)

Disputing Escrow Analysis

When to Dispute

If you believe:

• Tax estimate is wrong
• Insurance amount is incorrect
• Calculation has errors
• Payments not credited properly

How to Dispute

1. Review statement carefully
2. Gather supporting documents
3. Contact servicer in writing
4. Explain the specific error
5. Request correction

Documentation to Provide

Issue	Documentation
Tax error	Tax bill, assessment notice
Insurance error	Policy declaration page
Payment error	Cancelled checks, bank statements

Escrow Waivers

What It Is

Some borrowers can waive escrow:

• Pay taxes and insurance directly
• No escrow account
• More control, more responsibility

Requirements to Waive

Typically need:

• 20%+ equity
• Good payment history
• May pay higher rate or fee
• Lender approval

Pros and Cons

Pros	Cons
Control your money	Must budget for large bills
Earn interest on funds	Risk of missing payments
No escrow surprises	May forget deadlines

Refinancing and Escrow

New Escrow Account

When you refinance:

• Old escrow is refunded (within 30 days)
• New escrow account established
• New initial deposit required

Timing Considerations

Refund from old servicer:

• May take 30 days
• After payoff is complete
• Sent to your address on file

Initial deposit on new loan:

• Due at closing
• May be several months of escrow
• Varies by timing of taxes/insurance

Special Situations

New Home Purchase

First year issues:

• Taxes may be based on prior owner
• Reassessment coming
• Escrow may be underestimated
• Expect adjustment in year 2

Tax Exemption Changes

If you lose an exemption:

• Homestead exemption (moved out)
• Senior exemption (age requirements)
• Disability exemption
• Taxes increase significantly

Disaster Areas

After disasters:

• Insurance premiums often spike
• May see significant escrow increase
• Shop aggressively for coverage

Frequently Asked Questions

Why did my mortgage payment go up?

Most likely your escrow increased due to higher property taxes or insurance premiums. Review your escrow analysis statement to see exactly what changed.

Can I pay the escrow shortage all at once?

Yes. Paying the lump sum avoids spreading it over 12 months. Your payment will still increase for ongoing higher costs, but you won’t have the shortage repayment portion added.

How often does escrow analysis happen?

Annually. Your servicer analyzes the account once per year and sends you a statement showing any shortage, surplus or changes to your payment.

Can I dispute an escrow increase?

Yes, if you believe there’s an error. Contact your servicer in writing with documentation showing the correct tax or insurance amounts.

What if I can’t afford the higher payment?

Contact your servicer. Some allow extended repayment of shortages (up to 24 months). You may also shop for lower insurance to reduce costs.

Will my payment go back down?

Maybe. If the shortage is repaid and costs stabilize, next year’s analysis may show a lower payment. But if costs keep rising, the payment stays higher.

Can I cancel my escrow account?

Possibly, if you have 20%+ equity and good payment history. Contact your lender about escrow waiver options. You may pay a fee or slightly higher rate.

What happens if there’s a surplus?

If your escrow surplus exceeds $50, the servicer must refund it to you within 30 days after the analysis. Your monthly payment may also decrease.