Why Your Mortgage Escrow Account Keeps Growing

by | Apr 18, 2022

Today we’re going to go over why your mortgage escrow keeps growing. Now your mortgage escrow can grow in one of two ways – the number of your escrow balance on your statement grows every month, and then your monthly amount collected can grow every year…we’ll go over both, what the heck it means and why you need to get clear on what exactly your mortgage escrow is doing as it grows bigger and bigger and bigger and bigger…

Mortgage Escrow accounts

Escrow accounts are also referred to as impound accounts. First of all, let’s talk about what is in a mortgage escrow account. It can be one of four things.  You can either have nothing in your mortgage escrow account (which is also known as not having an escrow account) or you can have your property taxes in your escrow account, orrrr you can have your homeowner’s insurance in your escrow account, orrrrrrrrr you can have both your taxes and your homeowner’s insurance in your escrow account. So nothing, taxes, insurance or both taxes and insurance.

Most people have both their taxes and insurance in their escrow account. And why is that you may ask – and maybe you’re not asking but guess what I’m going to tell you anyways…cause that’s what I do, I ask hypothetical questions and then answer them myself whether you want me to or not.

Forced to have an escrow account

The first reason people have their taxes and insurance in an escrow account is because they are forced to. If you buy your house with less than 20% down you are required to have your property taxes and insurance in an escrow account. Again, required – no choice. It’s a guideline that conventional and FHA loans both require. 

By the way, for those of you new to the mortgage game just know that whether you have an escrow account or not, you’re going to be paying your taxes and insurance. More on that in a second, but just know there’s no way to like not…pay…your…taxes. That doesn’t exist. And you also have to have insurance if you’re getting a loan because the lender wants to make sure their “you know what” is covered if there’s a fire. Otherwise that loan they gave you for the house can burn to ash too…

Some lenders actually give you a better mortgage interest rate or better pricing on your rate if you impound your taxes and insurance. And the reason is simple, if they collect your taxes and insurance for you every month then they know those are going to get paid so there’s a much smaller chance that you default on those which would make that loan they gave you to buy the house stable because you’re not becoming delinquent on property taxes and you haven’t missed a payment on your insurance so if your house – ever did catch fire, G-d forbid, they know the insurance will bail you out and in effect bail them out of the money you loaned them. 

When it’s not forced

Now – if you bought your house with 20% down or more then you can voluntarily opt-out of having a mortgage escrow account and you can just pay your property taxes directly to the county you live in and you can pay your insurance bill directly to whoever you are insured with be it Farmers, Mercury, Roy’s shady home insurance company LLC incorporated…whatever – by the way Roy’s shady home insurance company LLC incorporated – not someone I recommend, I think he has like 1 star on Yelp so avoid them like the plague. 

Now just know that if you become delinquent on either one of these your mortgage lender will FORCE you to pay them or FORCE you to start an escrow account so, again, there’s no way out of paying either of these.  

It’s incredibly convenient

The second reason MOST people have an escrow account for their taxes and insurance is that it is incredibly convenient. Having an escrow account is the equivalent of a cup holder in a car – it’s just super useful. Instead of having to put aside money every month so that when your taxes and insurance are due you actually have the money to pay it, your escrow account makes it part of your monthly cost and then pays the bills for you when they’re due. Almost like a concierge bookkeeper. 

Reasons not to have an escrow account

Why would anyone not have a mortgage escrow account, you may ask – well, in order to fund that escrow account when you buy the property you actually need to give a few extra months of each to pad the account so there’s some upfront costs. Now those are never kept by the lender…but they hold onto it until you refinance, sell, or payoff the property so it’s essentially theirs to hold onto for years.  Also, lenders can make mistakes. I’ve had some clients where they just messed up and didn’t pay something on time or got the amount wrong and it caused a big headache. That’s exceedingly rare but it does happen. 

The whole point of your mortgage escrow account, however, is that you have a fixed payment every month. That’s the idea, you don’t have to have this separate fund for your taxes and insurance set aside in a separate savings or checking account – it’s just all one bill. The problem is that the amount of your escrow payment can increase or grow every year.  How is that possible? After all, a 30 year fixed mortgage should be fixed, right? The idea is that the payment never changes – and it doesn’t. The principal and interest on your mortgage never budges.

NOT EVEN BY A PENNY…

But your property taxes and insurance are dictated by the government and your insurance provider – which really have nothing to do with your lender. Property taxes go up a little bit every year so your escrow monthly payment will, 100% guaranteed, go up every year just on the property tax side. Your insurance also tends to go up slowly over time because the cost of insuring properties gets more expensive as materials and labor get more expensive. Also, if there’s a major disaster like a fire that takes out tons of homes in your area, expect your insurance payment to go up significantly the next time that bill comes around. Being in California where wild fires have seem to just steadily get more common unfortunately, this is a really sad reality that a lot of my clients see on their own policies.

Shop Your Insurance

One thing you can do is always shop your insurance around. Sometimes it’s just a matter of making a few phone calls to insurance brokers to check if you’ve got the best rate available and switching is usually a fairly simple process so it never hurts to check your insurance bill once or twice a year just to make sure it’s not overly expensive. However, I will say it’s always better to be a little over-insured than under-insured so definitely be frugal but don’t be straight up cheap on insurance. You don’t want a flood to happen and then just get your claim denied that would massively suck.  

Can you imagine? Just when you think you’re getting a new kitchen because there was a ginormous leak that you thought your insurance would cover, they point out in tiny little print on page 92 of their policy that if the leak started on a Thursday between the hours of 9am and 12pm that they won’t cover it. Of course, little loop holes that are that specific don’t really exist but there are some insurance companies that are a lot harder to work with on getting claims paid than others, so just another thing to be aware of.

Now, if your question about your mortgage escrow growing is about how on your mortgage bill your escrow balance is a higher number every month – well that’s normal. See your insurance is due once a year and your property tax is broken into two payments that are collected within a couple months of each other….so your mortgage bill is just showing you how much they have saved in your escrow balance month after month. In other words, this amount SHOULD go up every month until your bill is due then that piggy bank should get depleted substantially, and then as you continue paying your mortgage every month that account gets replenished every month until those ugly bills come knocking again and then the cycle just repeats forever, never, ever ending.

You gotta love taxes and insurance, right – they are relentless. 

Final Thoughts

So to sum it up your mortgage balance grows either monthly cause your paying your bills, or your mortgage escrow amount goes up when your property taxes increase or your insurance premiums increase – both are totally normal and nothing to worry about. If you see a substantial increase, of course, then be sure to call your lender and ask what the heck is going on but you should see small increases every year. 

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