Wednesday, April 12, 2023 / by Sonya Reiselt
Death and taxes are two things you can't avoid. One example of an unavoidable tax payment is the escrow account required when obtaining a mortgage loan. Not only will this guarantee lenders that borrowers can meet their monthly payments, but it also serves as a protection for Beaufort homeowners to keep the home they've bought.
It's not uncommon to see an increase in your mortgage bill due to higher escrow payments - however, all hope is not lost! You have the power to take action with options like protesting property taxes. In this article, we'll provide insights into what causes these increases and review the various steps you can take to address them.
Reasons for escrow payment hikes
When you close on your mortgage home purchase, your lender will set up an escrow account for you. This is used to manage loan and tax payments more seamlessly. Your monthly escrow charges are dependent upon the amount needed to cover your homeowners' insurance and property taxes. Typically, a debtor is requested to have a minimum balance of two months' worth of payments in this account. On top of the loan repayment amount, monthly mortgage bills entail the costs forwarded to an escrow account for taxes and insurance coverage. Typically, the cost hikes are caused by these three primary factors:
· A property tax hike in your locality
· An increase in your homeowners' insurance premiums
· Your creditor may have miscalculated your previous escrow fees
Because escrow payments are used to pay for property tax and insurance premiums, increasing these rates will pull escrow payments up.
How does an escrow account work?
Opening an escrow account requires lenders to investigate the current market rates to determine the escrow funds. Upon completion, borrowers will be issued with a statement containing the calculated payments and their due dates. Existing borrowers may request an account history and payment projections for the following year.
To ensure that adequate funds are available in escrow accounts to cover expense changes, lenders review property taxes and insurance charges on an annual basis. This type of review enables creditors to adjust their mortgage payments and escrow account amounts accordingly. It also allows lenders to calculate the appropriate amount of money needed for monthly tax and insurance charges.
Although their estimations may occasionally be incorrect, lenders will review the escrow account to uncover any potential shortages or excesses. Should an overage occur, you're eligible for a corresponding escrow refund; whereas a deficit will necessitate additional payments spread across the subsequent 12 months.
How to address escrow payment increases
Not many people know this, but taxpayers have the right to question their property's appraisal value, which can lower their property taxes. Similarly, mortgage lenders aren't required to choose an insurance company for their borrowers, allowing the latter to switch to another provider.
These two options can help lower your escrow payments. Here's how:
1. Protesting your property assessed value
Property taxes are assessed based on the value of your property and the local government's imposed tax rate. As an example, if a house is valued at $500,000 and has a one percent tax rate, the total property tax due would be $5,000.
Mortgage homeowners can challenge the assessed value their local government has placed on their property by presenting it to the appraisal review board (ARB). Decisions made by the ARB can be appealed in the state district court. Thankfully, certain companies offer these services for a small fee, simplifying the process and saving time.
2. Switch to a cheaper home insurance company
Average mortgage costs are expected to climb to $2,430 this year based on Realtor.com forecasts. Comparatively, the national median was $2,012 as of October 2022, or a difference of over $400 in just three months.
It may be beneficial to shop around and evaluate other companies in order to reduce your property home insurance premiums. By doing so, you could reduce your escrow payments as well.
When switching to a new insurance provider, proper research is essential. Compare different home insurance policies and make sure that it can satisfy your needs. Your goal should be finding the most cost-effective policy that also offers exceptional coverage.
Once you've identified the right policy for you, inform your lender and cancel your old one. Remember to make sure that your new coverage takes effect immediately after terminating your existing insurance. It's best to do this during the renewal period in order to avoid any hassles or issues down the line.
An escrow account is a financial instrument to protect lenders and mortgage homeowners, and understanding how it works can be challenging, especially for a first-time home buyer. Hopefully, the discussion above provided valuable and actionable insights that can help reduce your escrow payments.
If you don't have time or are still confused, contact property tax and finance professionals to help you navigate the system more efficiently.
Are you planning to buy or sell a home in Beaufort and the surrounding Lowcountry? Contact Sonya Reiselt today to find the latest homes for sale in the Lowcountry. And make sure to visit our blog every week for more Beaufort area real estate information.