Surprise! The monthly payment on your fixed-rate mortgage has changed. But, scores of borrowers who do not understand how escrow accounts work are scratching their heads, and asking themselves, "I thought my monthly payment wasn't supposed to change?"
According to the latest survey from LERETA, a national provider of real estate tax and flood services for mortgage servicers, two-thirds of the 1,000 respondents polled in December have seen their monthly payments increase over the past two years, and of that number, more than half were shocked they did.
The culprit, of course, are the annual adjustments to their escrow accounts because of increases in their property taxes and insurance. Many borrowers don’t understand the connection between their payments for principal and interest and their payments for taxes, homeowners insurance, mortgage insurance, and maybe even flood insurance.
Some 80% of all borrowers have an escrow account, which are used to pay their taxes and insurance. Lenders require them on conventional loans in which borrowers have 20% or less equity in their homes, and the Federal Housing Administration (FHA) requires them on loans it insures for the life of the loan, no matter how much equity borrowers have.
According to Intercontinental Exchange, Inc. (ICE), nearly a third of the typical payment on a single-family property is now made up of taxes and insurance. But because of rising house prices – up 29% since 2020 – many owners have seen their property taxes increase, some by double digits. At the same time, insurance costs also are rising, by 23% in 2024 alone, Quadrant Information Services reports.
But according to the LERETA poll, nearly half of those borrowers queried believe – mistakenly so – that their payment cannot change because they have a fixed-rate mortgage. And, the share of borrowers who believe that is rising, at 45% now versus just 36% when the taxes and flood insurance information provider surveyed owners in 2023.
Indeed, many borrowers admitted to pollsters that have a limited understanding of how escrow accounts work. Just three out of five (60% of) borrowers said they know how their accounts operate. A year ago, though, nearly four out of five said they knew how their accounts worked. In another words, escrow account comprehension is slipping.
Two-thirds of the respondents said their monthly payments have increased over the past two years. And of that number, more than half were surprised.
Over that time frame, four out of five saw their property taxes increase and seven of ten saw their insurance premiums rise. Of those who also had flood coverage, nearly three out of five saw those premiums rise as well. Worse, one in four had been dropped by their homeowners insurance carrier, and two-thirds found it difficult to find another insurer.
Surging escrow costs for flexible aspects of a borrower's monthly mortgage payment, like home insurance and property taxes, are generally not accounted for when underwriting borrowers. Now, these surging costs are posing systemic risks to the mortgage market.
According to the survey, half the owners queried said it would be a hardship if their monthly payments increased by just 10%, and almost half voiced concern about making their payments if they rose by 25%. Half said they would consider selling and relocating to a place with lower property taxes, and a quarter said the same if their insurance premiums increased significantly.
Citing the need for borrowers to fully comprehend their escrow accounts and how they operate, LETERA CEO John Walsh indicated more should to be done to educate them before it is too late.
“As these expenses account for an increasingly larger share of monthly mortgage payments,” Walsh said in a statement, “it’s more important than ever for home owners to understand how escrow accounts work to avoid any confusion or financial stress.”
He credited most lenders for “doing a good job” of making escrow account information available to their clients. But he warned that some borrowers “still feel undereducated.”
