Having an escrow account set up with your mortgage lender can make budgeting easier by spreading property tax and insurance costs throughout the year. But sometimes, an escrow shortage can occur when there aren’t enough funds to cover upcoming expenses.
If you’ve received notice of an escrow shortage, one option is to pay the full amount immediately. Here, we’ll look at some of the common questions surrounding paying off an escrow shortage in full:
What Causes an Escrow Shortage?
There are two main reasons why an escrow shortage happens:
- Increased property taxes from the prior year
- Higher homeowner’s insurance premiums compared to the previous year
As insurance rates rise due to inflation and claims costs, premiums have gone up significantly in some cases – even 50% or more. Property tax assessments may also jump, creating a gap between the escrow balance and required disbursements.
Can I Pay Off My Escrow Shortage in One Lump Sum?
Yes, you can opt to pay your escrow shortage in full with one payment. Your lender should provide instructions on how to do this. Some ways it may be possible:
- Send a check by mail payable to your mortgage lender
- Pay online through your lender’s website if available
- Arrange an electronic transfer from your bank account
Paying off the full shortage at once eliminates it completely and may give peace of mind But it also requires having those funds readily available
What Happens After I Pay the Shortage in Full?
After paying your escrow shortage amount in full, your escrow account balance is replenished. Your lender will likely still adjust your mortgage payment going forward. This helps ensure your escrow account stays funded appropriately for upcoming bills.
So while the immediate shortage is resolved, don’t expect your total monthly payment to decrease after paying a shortage in full It may increase or stay about the same
Are There Any Benefits to Paying Off an Escrow Shortage in Full?
A couple potential advantages exist:
- Brings your escrow account current right away
- Avoids paying shortage over 12 months through increased mortgage payments
- May provide mental relief knowing the issue is completely resolved
However, no interest accrues on escrow shortage amounts. So paying in full doesn’t save money over making up the shortage through higher monthly payments.
What Should I Consider Before Paying My Full Escrow Shortage?
Assess your overall financial situation first. Things to think about:
- How much is the shortage amount? Make sure you have the funds available without tapping emergency savings.
- Could I manage the monthly payment increase instead? This spreads out the shortage over 12 months.
- Are any other major expenses coming up that I need to save for?
Also talk to your lender about your options before deciding They can explain the impact on your account and monthly payments Having all the details helps make an informed choice.
Are There Alternatives to Paying Off an Escrow Shortage?
If funds are tight, you may have alternatives:
- Spread repayment over 12 months – This lessens the immediate impact to your budget.
- Lower insurance premiums – Shop around to find better rates and maximize discounts. Adjust coverage if needed.
- Appeal property taxes – If an assessment seems high, contest it with your local tax authority.
- Put extra toward escrow monthly – Making voluntary contributions can build a cushion.
- Refinance your mortgage – Depending on rates, refinancing may lower your payment.
Spending less where possible frees up more to cover the shortage too. A money makeover could identify expenses to cut back on.
What Mistakes Should I Avoid With an Escrow Shortage?
A couple pitfalls to steer clear of:
- Don’t drop or reduce insurance coverage just to lower premiums without understanding the risks. Discuss options with your agent.
- If you get an insurance refund check, call your lender to find out if it needs to go toward your escrow account.
Slow down and make informed insurance decisions. And alert your lender about any account credits to ensure they are applied correctly.
How Do I Prevent Escrow Shortages in the Future?
To help avoid recurring shortages:
- Review property tax assessments annually and appeal if too high
- Shop insurance rates at renewal to find the best value
- Open a savings account for unexpected escrow needs
- Watch for escrow statements and notices from your lender
- Save for first year taxes on a new construction home
Also make voluntary escrow payments or request an escrow analysis if you anticipate issues. Staying proactive helps minimize the chance of future shortfalls.
Key Takeaways on Paying Off an Escrow Shortage
- One option is paying the full shortage amount immediately, if funds allow.
- Your monthly mortgage payment will likely still increase afterwards.
- Consider your overall financial situation and alternatives before deciding.
- Avoid dropping insurance coverage without understanding the risks.
- Shop insurance rates, appeal taxes, and save for escrow as shortage prevention.
Knowing the pros and cons of paying an escrow shortage in full helps you make a well-informed decision. Analyze your budget and discuss all aspects with your lender. This addresses the shortage properly while setting up your escrow account for success long-term.
Calculating Shortage & Surplus On your
Then, we compare your escrow account’s lowest projected balance in the year ahead to your minimum required balance.
- If the lowest projected balance is less than your minimum required balance, you have a shortage.
- If the lowest projected balance is more than your minimum required balance, you have a surplus.
If your analysis projects that your lowest escrow balance in the year ahead will be $350, you have a shortage of $250. ($350 – $600 = -$250)
If your analysis projects that your lowest balance will be $800, you have a surplus of $200. ($800 – $600 = $200)
Can I avoid escrow shortages?
- If you have a surplus of more than $50 and your account is current, we’ll send you a check within 30 days of the escrow analysis.
- If the surplus is less than $50 and your account is current, we’ll spread the surplus over the next 12 months to reduce the monthly payment.
- If the account is delinquent, the surplus will remain in the escrow account for future disbursements. Note: Current accounts in Nevada (NV) will be sent a surplus check, even if it is less than $50.
Why You Should NEVER Use a Mortgage Escrow Account
FAQ
What happens if I pay my escrow in full?
Will my monthly payment go down if I pay extra on my escrow?
If your mortgage company is collecting too much for your homeowners insurance, you may be able to request a reevaluation of your escrow account. A decrease in your monthly escrow amount would end up decreasing your total monthly mortgage payment.
Is there a benefit to pay escrow shortage in full?
But paying the shortage in full won’t save you any money because interest isn’t charged on a shortage amount. And it might not always be possible to pay the full shortage in one lump sum. It can be a significant financial burden—especially if the shortage is large.
Can you pay off escrow early?