After you close
Why did my fixed-rate payment go up?
If you have a fixed-rate loan, your interest rate is locked for the life of the loan. Your principal and interest payment will never change. But your total monthly payment can also include more than just principal and interest, and that is where the surprise comes from.
This page is for borrowers whose loan includes an escrow account. If you pay your property taxes and insurance directly (not through your lender), this does not apply to you.
In a hurry?See the key points
- A fixed mortgage rate keeps principal and interest stable, but taxes and insurance can still change the total payment.
- An escrow analysis compares the account balance and monthly collection with upcoming tax and insurance bills.
- Higher bills can create a shortage because the account collected money using the previous amounts.
- The adjusted payment can include both the new monthly need and repayment of the existing shortage.
- After the shortage is repaid, the temporary repayment ends, and the payment drops back to the new monthly need.
Your monthly mortgage payment has two parts. Only one is fixed.
When people say they have a fixed-rate mortgage, they mean the interest rate on their loan will never change. That is true. But the total amount debited from their account each month is not always just principal and interest. It can also include escrow.
Principal + Interest
This is the portion that pays down your loan balance and covers the interest charged by your lender. It is calculated from your rate and loan amount at closing and does not change for the life of the loan.
Escrow
This is money collected each month to pay your property taxes and homeowner's insurance when they come due. Your lender holds it in an escrow account and disburses it on your behalf. This amount is recalculated at least once per year.
The key distinction: When your payment goes up on a fixed-rate mortgage, your rate has not changed. Your principal and interest have not changed. What changed is the escrow portion, because your property taxes or homeowner's insurance (or both) increased.
A 12-month escrow budget based on the best information available.
Your escrow account works like a savings jar. Each month, a portion of your payment goes into the jar. When your property tax bill or insurance premium comes due, your lender pays it out of the jar on your behalf.
At closing, the budget is set
When you close on your home, the escrow account is set up using the most recently available tax and insurance information. If your insurance is $2,000/year and your taxes are $4,200/year, your monthly escrow payment is ($2,000 + $4,200) / 12 = $517/month.
You pay that amount every month
For the next 12 months, $517 goes into your escrow account each month. This is the only way to budget for escrow: assume the amounts will stay the same, because we do not know what next year's taxes or insurance will be.
Taxes and insurance change
It is unlikely that taxes and insurance will remain the same year over year. Property values rise, tax rates adjust, insurance premiums increase. When the next bill comes due, it is almost always higher than what was budgeted.
The escrow analysis catches up
Generally once per year, your servicer performs an escrow analysis. They look at what was collected, what was disbursed, and what is projected for the coming year. If more went out than came in, you have a shortage. Your payment is then adjusted.
The timing matters. The escrow analysis does not happen in real time. It typically happens once per year, timed around the projected low balance in your account. The timing varies from servicer to servicer. That means if your taxes or insurance increased months before your analysis date, you have been underpaying for that entire period without an adjustment.
The monthly escrow amount is calculated so that the account never drops below a two-month cushion of taxes and insurance at its lowest point during the year. This buffer is the maximum allowed under federal law and is what your servicer uses to determine how much needs to be collected each month.
The escrow payment increase can be more than the year-over-year difference. Here is why.
When costs go up, the new escrow payment has two components: the new, higher amount going forward, plus a surcharge to repay the shortage that accumulated during the months before the analysis caught up. That is why the increase feels larger than expected. Plug in any numbers below to see it in action.
The examples below are illustrative. The 12-month cycle shown here is simplified. In practice, the exact timing varies depending on the state, the lender or servicer, and when you closed. Tax payment schedules also differ by state. The mechanics are the same, but when they occur will be specific to each situation.
Original annual amounts (at closing)
New annual amounts (after change)
Escrow analysis typically happens once per year (12 months), but the timing varies.
Your fixed-rate loan is fine. This is how escrow accounts work.
When you receive an escrow shortage statement, it is natural to feel concerned. The numbers look alarming and the language can be confusing. But nothing is broken. No one made a mistake. Your rate has not changed. Your loan terms have not changed.
"My payment went up. Something must be wrong with my loan. Did my rate change? Did the lender make an error? Why is my escrow account negative?"
Your property taxes or insurance changed (or both). Your escrow account was budgeted based on the old amounts. Now it needs to adjust , collecting more if costs went up, or reducing your payment if costs went down.
Your interest rate is unchanged. It is the same rate you locked at closing.
Your principal and interest payment is unchanged. The fixed portion of your payment is still fixed.
The shortage is temporary. Once repaid (usually over 12 months), that portion of the increase drops off.
You can often pay the shortage as a lump sum to avoid the monthly surcharge. Contact your servicer to ask.
One major benefit of an escrow account: the lender pays taxes and insurance on time regardless of how much money is in the escrow account. Even when costs jump significantly, the lender writes the check in full and then adjusts the payment to recover the difference. Without escrow, a large unexpected tax or insurance bill would be entirely on the borrower to pay out of pocket all at once.
What to remember about escrow shortages.
"Fixed rate" means your principal and interest are fixed. Your total payment includes escrow, which can change.
Escrow accounts are budgeted using the most recently available tax and insurance information. They cannot predict the future.
When taxes or insurance increase, a shortage is created because you were paying based on the old, lower amounts. When they decrease, a surplus accumulates.
For increases: your new payment covers the higher amount going forward AND repays the shortage from the months you underpaid.
The shortage repayment is temporary (typically 12 months). After it is repaid, that portion drops off.
For decreases: your servicer is required to refund any overcollected surplus beyond the amount allowed to be held in escrow at any one point in time, and your payment going forward will reflect the lower need.
You may have the option to pay a shortage as a lump sum to keep your monthly payment lower. Ask your servicer.
Nothing is wrong with your loan. This is a normal, expected feature of how escrow accounts work.
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