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Mortgages exceeding 80% of home value require borrowers to pay additional amounts into an "escrow"account used for paying property taxes and insurance.

Your FHA Mortgage: Understanding Your Escrow Account

Mortgages exceeding 80% of home value require borrowers to pay additional amounts for property taxes, hazard insurance, and mortgage insurance premiums (MIP). FHA guidelines allow for the annual portion of mortgage insurance premiums to be pro-rated and added to monthly mortgage payments.

PITI Me: My Mortgage Payment Is Going Up!

PITI stands for principle, interest, taxes, and insurance. If you don't pay property taxes, or allow your hazard insurance to lapse, your mortgage lender risks losing its collateral (your home) to a tax sale or fire. FHA home loans also require payment of the annual MIP. Mortgage lenders collect the amounts needed for taxes and insurance and pay these expenses on your behalf.

FHA Loans and Escrow Accounts

When you purchase or refinance with FHA loans, funds paid into your escrow account are held separately from other mortgage lender accounts; FHA approved lenders are required to maintain separate accounting for borrower funds collected for paying taxes and insurance. Your lender compares what you pay into escrow against actual and projected costs for taxes and insurance, and provides an annual accounting of escrow funds collected and spent.

Mortgage Escrow Shortages: Oh No! I Owe: Your mortgage company may determine that your escrow account is short; they've paid out more than they collected. This can occur for several reasons:

  • Re-assessment of a new home: If you buy a brand new home in a new development, your first property tax bill may be based on unimproved land. Once your home is built, your property value and tax assessment increase.
  • New assessments: If your neighborhood receives new sidewalks, lighting, or other public improvements, you'll likely receive a supplemental assessment for covering the cost of such improvements. Mortgage lenders may not be aware of supplemental assessments, which can cause large adjustments in your monthly escrow payments.
  • Increased tax and insurance costs: Changes in costs for taxes and insurance are reflected in changes to your mortgage payments: Your mortgage lender will adjust your payment accordingly.

Budgeting for increases in property taxes and hazard insurance can help avoid surprises when you receive your mortgage company's annual accounting of tax and insurance expenses.

Karen Lawson
Karen Lawson is a freelance writer with extensive experience in mortgage banking and home loan loss mitigation programs. She holds BA and MA degrees in English from the University of Nevada, Reno.