Get ready to rework your budget. The average homeowner will see their rise $175 per month in 2026, according to property information and analytics firm . That cash is needed to shore up their loan’s escrow account — a pot of money used by lenders to pay and property tax bills on behalf of the borrower.
“We’re seeing some big, big jumps,” says Ashley Harris, director of homebuyer education for Neighbors Bank, which operates nationwide. A Neighbors Bank finds that taxes and insurance now make up 21% of monthly mortgage payments, on average.
As insurers look to recoup costs on claims related to expensive natural disasters, they have raised premiums. What’s more, property values continue to climb in many parts of the country, which, in turn, boosts property taxes. Together, those costs are causing escrow accounts to run dry and homeowners are left to cover the difference or see their monthly payments increase.
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What Is an Escrow Account?
An escrow account is a fund set up by a mortgage lender to collect and pay out expenses related to a home, primarily insurance premiums and property taxes. Most escrow accounts also include a cushion equal to two months of escrow payments.
“It is a protection to the lender and the servicer,” Harris says. An escrow account guarantees a lender that home insurance will be maintained on the property and that taxes will be paid.
These accounts are required for FHA loans. If you have a , you can opt out of an escrow account. In that case, you would pay your homeowners insurance premiums and property taxes directly. However, waiving an escrow account comes at a cost. Lenders may assess an additional fee at closing or charge a slightly higher interest rate to borrowers who take this route.
“An escrow account is one of the ways lenders help make homeownership more manageable,” writes Jim McDermott, head of mortgage servicing for Wells Fargo Home Lending, in an email. An escrow account benefits borrowers by allowing them to avoid large lump-sum payments for insurance and taxes. “It’s built right into your monthly payment so you don’t have to think about it,” McDermott says.
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What Causes an Escrow Shortage?
Escrow accounts represent a lender’s best estimate of what a home’s costs will be in the coming year. However, when expenses rise faster than expected, a shortage can occur. This year, 65% of escrow accounts are expected to face a shortage, according to Cotality, with a projected average shortage of $2,100.
There are two main causes of an escrow shortage:
— Property taxes
— Home insurance, including and other
“The insurance is usually the big culprit,” says Jeremy Schachter, a branch manager of Fairway Independent Mortgage in Phoenix. “Homeowners insurance rates are going through the roof.”
Rising property taxes can also cause an escrow shortage, and homebuyers of newly constructed homes should ask how their initial mortgage payment is calculated.
“A lot of lenders estimate the taxes on new builds on the land,” according to Schachter. That causes a problem when property taxes are actually calculated based on the value of the land plus the value of the home built on it. He notes homebuilding company D.R. Horton is facing a class action lawsuit from homebuyers who say they were misled about the cost of their mortgage because the company didn’t accurately represent ongoing property tax costs.
What Happens When You Have an Escrow Shortage?
Each year, a lender is required to run an escrow analysis, which reviews the expenses paid out over the past year and estimates the expenses for the upcoming year. If the escrow account doesn’t have enough to cover expenses and leave a two-month cushion, a homeowner will receive notice of an escrow shortage.
There are two ways to address a shortage:
— Pay it off in a lump sum
— Pay it off monthly as part of the mortgage payment
“Both approaches have merit,” McDermott says. “It really comes down to your financial priorities at that moment.”
Paying off the balance in a lump sum means you can minimize any increase in your monthly payment. However, paying off the shortage over the course of a year might be more manageable for some households.
Harris reminds homeowners that even if they pay off their escrow shortage in a lump sum, their monthly payment will still go up. A lender will adjust the escrow payment going forward to try to avoid a shortage next year. Spreading the shortage over 12 months, rather than paying it off in a lump sum, means you could end up paying double the scheduled increase.
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How to Avoid an Escrow Shortage
For homeowners and lenders, there are limited options to avoid an escrow shortage.
“Since property taxes and insurance premiums are set by outside parties, there’s no way to prevent every shortage,” according to McDermott.
Two options available to homeowners include the following:
— Disputing a property’s assessment
— Shopping for cheaper home insurance
Property assessments can be appealed, and if successful, that can reduce taxes. A from Realtor.com estimates 40% of homes could save $100 or more in taxes by appealing their valuation. Appeals typically must be filed with a local board of review within a specific period of time, and to be successful, you’ll need to provide evidence to support lowering .
Shopping for new insurance is another option. While comparing quotes, Harris cautions that some insurers are moving to deductibles that are applied as percentages rather than flat amounts. These policies may have cheaper premiums, but can cost significantly more if you need to file a claim.
“In life, everything is getting more expensive,” Schachter says, and that means escrow shortages may become more common. “It’s nothing that the lender did wrong. It’s nothing that you did wrong.”
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