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Originally posted by AllenInAR:

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Originally posted by rizzle:
Make sure it's not a fraud email, especially if they are asking for $1K to keep payment the same.

This was literally my first thought, and after reading the email, I went straight to my app.

So that increase in the shortage/surplus is just a bank thing "just in case"? That sucks. This is only the second house I've ever owned, and I was used to seeing small (under $10/mth, both up and down) fluctuations with the first one. This one was a bit of a shocker.

It isn't just in case. It is to pay for known increases in taxes and insurance.

Your lender does what I call “padding” with escrow. So to me it’s like this..your property taxes and/or homeowners insurance goes up, well the lender doubles down and charges you even more to pad your escrow account. It’s absolute bullshit.

My advice, pay your own taxes and homeowners and get your lender out of both. They always pad it with extra money so it’s like a little savings account for your lender at your expense.

Condensed version, estimate of future expenses generally adjusted annually placed in a non interest bearing account at least for the property owner.

Now the lender takes these funds, places them in a interest bearing account for them, disburses funds for things like property taxes, special assessments and property insurance to protect their investment a.k.a. money that they loaned of behalf of the property buyer.

So, in summary, another way for the lender to make money, escrow accounts. If you can, pay your own way.

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They always pad it with extra money

My lenders have never done that. They have always used this year's expenses to estimate next years. Unless my taxes or insurance decrease (almost never happens) they'll never have "extra". It's usually the opposite where those expenses increase and I can either pay them the exact amount of the increase in one lump sum, or the amount of that increase is divided by 12 and added to the payment.

And let's face it, most people are better at paying a lower monthly amount than having to come up with thousands of dollars in a lump sum. Seeing that lenders would prefer to see your insurance and property taxes paid, this is why what they do generally makes more sense than their customers doing it on their own.

I like to keep my non-monthly expenses to a minimum. I don't mind that the mortgage company earns interest on the float of my property tax and home insurance funds.

The monthly amount for escrow is such that after they pay the expenses, there's a month's worth of payment remaining.

Pretty common, basically your HO renewed and there wasn't enough in escrow to pay the increase for the year.

The Bank will go ahead and fund the increase however this leaves a deficit in the Escrow account that you need to make up.

In addition your current payment escrow portion is insufficient to create the funds necessary to pay next years anticipated insurance/tax payments since it increased.

So the bank bumps the payment to cover a) the shortfall for the current year, and b) the anticipated amount needed to not be short for the next insurance/tax payment.

It's a double whammy when it happens, if your insurance goes up $50, then they pay it, and need to recover the $50 per mo increase ($600), and, they need to bump the base by $50 to cover the next year, so you get a one Year $100 bump.

Or you can pay them $600 to cover the advance and you'll see half the increase.

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Originally posted by a1abdj:

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They always pad it with extra money

My lenders have never done that. They have always used this year's expenses to estimate next years. Unless my taxes or insurance decrease (almost never happens) they'll never have "extra". It's usually the opposite where those expenses increase and I can either pay them the exact amount of the increase in one lump sum, or the amount of that increase is divided by 12 and added to the payment.

And let's face it, most people are better at paying a lower monthly amount than having to come up with thousands of dollars in a lump sum. Seeing that lenders would prefer to see your insurance and property taxes paid, this is why what they do generally makes more sense than their customers doing it on their own.

Every time I’ve had escrow, this is exactly what they did. I handle a large amount of money at work, so half my job is finance. So escrow is about like playing with legos in comparison. They padded it every time. When they throw in that “extra” required, for me it was their estimation of what homeowners insurance and property tax would increase to the following year and it was never correct. They always added extra money to it to cover themselves, at my expense. It’s just an estimation and the escrow department was completely inept. I don’t miss the days of having to give the escrow department a check for $1000 then my mortgage payment (with escrow) still increased.

I completely disagree with you on this “lump sum” business. It’s not rocket science. Homeowners insurance bills monthly. Mine is set up for auto pay out of checking so I don’t have to do anything. Property tax, I base previous year + 10% as that’s the max allowable by the county to raise it every year and they raise it by that amount every year. Take that annual property tax estimation, divide by 12, and put that dollar amount into savings every month. I make interest money off of that. It isn’t substantial but it’s better than the escrow department of your lender making % versus you. It’s not difficult in the slightest. The lender has the homeowners insurance information so they are free to check it any time they like. Same for the property tax. This is much easier for me to manage vs. going into my lender’s escrow department online and having to analyze their increases to figure out wtf they are doing.

Everyone do what they like however. My money, my property, I’m managing it. Not some 3rd party idiots at the lender. Escrow dept pads, adds extra to cover their own stupidity and it came at my expense. Better to cut them completely out of it and mange it all myself. End of year, when it’s time to write that yearly property tax payment, it’s already sitting in my savings account. My homeowners policy + property tax is $1000 a month. That’s more than my mortgage and I’m better at managing that then they are.

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Escrow dept pads, adds extra to cover their own stupidity and it came at my expense.

Not counting the potential interest you may have earned by holding that money in your own account, how is it possible that they "added extra" "at your expense".

They entire point of an escrow account is to hold money and limit to who, how, and when it is dispersed. They don't get to keep the extra, and it doesn't disappear into the vapor.

If you put $1,000 into escrow and they spend $900, you get $100 back (in either a refund or a credit). If you put $1,000 into escrow and they spend $1,100, you owe the $100 (in a lump sum or split into payments over time).

If anything else is going on something is wrong. It should cost you the exact same amount to pay your taxes and insurance whether the bank is writing those checks or you are.

The "pad" isn't some random amount. I believe it is almost always two months of estimated annual expense. The idea is to cover shortfalls in nominal increase years.

As others have described, bank likely paid up more than they had in reserve, you're paying that back along with 1/12 of annual amounts plus 1/12 of two months "pad" to get back on track.

Every bank I've ever worked with since the 90's gives you a detailed analysis of this that even a Caveman can understand. Did you not get this?

eta - if they overestimate the amounts by something greater than the prescribed cushion, they will actually issue a check in most cases on annual analysis. While that doesn't happen often, I have had it happen.

When you sell a property, you're also going to get any remaining balance in escrow back after closing. It generally won't come into closing as a credit, but will show up as a checking in a few weeks after payoff.

The escrow account, like everything else in these transactions, is almost certainly covered by an escrow agreement or some provisions in the security agreement or mortgage. Read them and see what they call for and allow the lender to do.

If you agreed to an escrow account, it may not be possible to just opt out, which some people seem to imply.

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Originally posted by Georgeair:
The "pad" isn't some random amount. I believe it is almost always two months of estimated annual expense. The idea is to cover shortfalls in nominal increase years.

Exactly. I even stated above “what I call padding”. I prefer to have amounts exact, no ambiguity, or really no “extra”. Their “extra” didn’t sit well so I’d rather handle it myself. Instead of dealing with their padding, well homeowners is auto deducted each month and I save every month for property tax, putting it into a designated savings account for it and I accrue interest on that until the end of the year when it’s time to pay the fiddler.

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Originally posted by sigcrazy7:

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Originally posted by AllenInAR:
There is also something called escrow shortage/surplus that went up $80/mth and I'm guessing those two make the $130/mth.

But what's that last one from?? So my insurance goes up but the shortage/surplus ALSO goes up even more than the insurance??

Check your current escrow balance. It’s likely a negative number. That second number is repayment of the loan the bank gave you to cover the current taxes and insurance. It’s just you paying them back. In other words, your insurance and taxes were much higher than projected in the current year. Also, they’re trying to build a larger cushion so you’re covered in the current year, anticipating additional increases.

Shop for new insurance and appeal your tax assessment. That’s how you reduce that escrow payment.

On point!