The following post is from Melissa Batai
If you’re a first-time home buyer, you’ll probably encounter many expenses that you had not planned on, but one will likely not occur to you until after your first year in your house—an increase in your monthly mortgage due to increases in home insurance or property tax which call for an increase in the amount of money that you have in your mortgage escrow account.
Depending on the type of mortgage you have, or if you pay less than 20% down, you may have to have a mortgage escrow account. This is additional money that you have to pay on top of your monthly mortgage to cover your home insurance, property tax, and, if applicable, private mortgage insurance (PMI). Then, the mortgage company pays your insurance, property taxes, and PMI each year. While this requirement is convenient because you don’t have to worry about paying these bills yourself, it can also cause havoc with your budget if you don’t plan for the increase.
We have a mortgage escrow account, and we’ve been in our house for four years. Every single year, our mortgage has gone up. We’re now pay $60 more a month than we were paying when we first took out our mortgage.
However, there are ways to try to avoid this extra expense.
Pay a Once a Year Lump Sum
Each year, we’ve been given a notice that we’ll need to pay more in our escrow account in the coming year. We have the option of spreading the account shortage out over 12 payments (resulting in a higher mortgage) or paying in one lump sum. This year, we opted to pay in one lump sum to keep our mortgage payment from getting higher and higher every year.
While it’s nice to spread the payments out over 12 months, in the end, you’ll be paying more than your starting mortgage payment, especially if you choose this option year after year.
Check Insurance Rates
If it’s been awhile since you priced home insurance, now might be the time to do so. If you call around and find cheaper home insurance that gives you the same coverage that you currently have, you may be able to switch and avoid a hike in your mortgage escrow account.
Dispute Your Property Tax
Likewise, if you feel that your home’s assessed value is too high, you can dispute your property taxes. Doing this isn’t as easy as calling for home insurance rates. You’ll need to do your research first and will likely have to have a hearing with the county. If you’d like to pursue this option, This Old House has an excellent primer.
Try to Close Your Escrow Account
Finally, see if you can close your escrow account. If you have a mortgage escrow account because you paid less than 20% down at purchase time, you may be able to close the account when you reach 20% equity in your home. You’ll need to petition to have the mortgage escrow account closed. Keep in mind, you’ll then be the one responsible for paying the taxes and home owners’ insurance on a timely basis.
Many homeowners don’t realize that even if they have a fixed interest rate on their home loan, they may face rate hikes year after year thanks to their mortgage escrow account. Be prepared when buying a home to know that this is just one more likely additional expense of owning a home.
My Question for You
Do you have a mortgage escrow account? If so, do you prefer to pay increases in one lump sum or spread out over 12 months, raising your overall monthly payment?