If you’ve recently received a notice from your mortgage servicer telling you that your monthly payment is increasing, you’re not alone — and you’re probably wondering why. The most common culprit is an escrow shortage, and in Washington State’s higher-cost markets, these notices have been a regular occurrence as property values and tax assessments have climbed.
Here’s what’s happening and what you can do about it.
What Is an Escrow Account?
When your mortgage payment includes property taxes and homeowner’s insurance — which it does for most borrowers — those funds are collected monthly and held in an escrow account. Your mortgage servicer then pays your property tax bill and insurance premium directly when they come due.
The amount collected each month is based on an estimate of what those bills will total for the year. Your servicer divides the projected annual amount by 12 and adds that to your principal and interest payment.
What Causes an Escrow Shortage?
An escrow shortage occurs when the amount collected wasn’t enough to cover the actual bills when they came due. The two most common reasons in Washington State:
- Property tax increases — Washington State property taxes are reassessed regularly, and in higher-growth areas like King, Snohomish, and Pierce Counties, assessed values and tax bills can increase significantly from year to year. When your tax bill goes up but your monthly escrow collection hasn’t been adjusted yet, a shortage develops.
- Homeowner’s insurance premium increases — insurance costs have risen meaningfully in recent years. If your premium increased at renewal, your escrow collection may no longer be sufficient.
Mortgage servicers typically conduct an escrow analysis once a year — usually timed around when property taxes are paid. If the analysis shows a shortage, you’ll receive a notice.
What Are Your Options When You Have an Escrow Shortage?
Your mortgage servicer will typically offer two options:
- Lump sum payment — pay the shortage amount in full upfront. This keeps your monthly payment lower going forward since you’re only adjusting for the projected future amounts, not repaying a deficit over time.
- Spread the shortage over 12 months — the servicer adds the shortage amount to your monthly payment spread over the next year, in addition to adjusting the base escrow collection for the new projected amounts. This means a higher monthly increase but no large upfront payment.
If you have the funds available, paying the shortage as a lump sum is often the better financial choice — it results in a smaller monthly payment increase going forward.
Will My Payment Go Back Down?
It depends on what happens to your property taxes and insurance in future years. If assessments stabilize or decrease, your escrow collection could decrease as well. If taxes and insurance continue to rise, so will your escrow payment. Your servicer recalculates annually.
What If You Have an Adjustable Rate or Interest-Only Mortgage?
Escrow changes aside, if you have an adjustable rate mortgage (ARM) whose fixed period is ending, your payment will change based on current index rates and your loan’s margin and caps. If you have an interest-only loan converting to principal and interest, your payment will increase as well. These are separate from escrow adjustments and worth a conversation with a mortgage professional to understand your options.
Could This Be a Reason to Refinance?
Sometimes a payment increase prompts homeowners to look at their overall mortgage picture. If you have a higher rate, significant equity, or PMI (mortgage insurance) that could be removed, a refinance might make sense — though the escrow portion of your payment will follow you to any new loan since it’s based on taxes and insurance, not your interest rate.
If you’re wondering whether your payment increase is a signal to take a closer look at your mortgage options, I’m happy to run the numbers.
Let’s Talk or Get a Free Rate Quote.
Rhonda Porter is a Licensed Mortgage Advisor (NMLS #121324) at New American Funding (NMLS #6606), serving homeowners throughout Washington State.
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About Rhonda Porter
As a former accidental landlord, I resisted raising rent to my tenant (whom I personally liked) unless my actual cost went up. This tax increase would certainly qualify to raise rents with a clear conscious. I would think that “softy” landlords like I was are in the process of jacking rents closer to the local market rate.
I agree. People who are not “professional” landlords probably don’t want to feel mean and have a tougher time increasing rents. However, when you’ve had tax increases over and over again (and with the last one being such a large one) it makes it difficult to avoid.