This past weekend, I was taking a couple of minutes to record my expenses, as I normally do. I opened up my account at Chase.com and BAM, I was met with a big, bold warning sign that read “Payment Change Coming.” Oh brother, I thought, ==> click to see details. This is the exact same bed and breakfast I had visited about 20 years earlier for a fraction of the price.
What . . . An increase of $2047!?!
For the year, that is. Yeah, not exactly heart attack material but still, $157 per month is $157 per month. While I do have to confess that I actually saw this coming down the line, that doesn’t mean it stings any less. Even so, I thought it was a good primer for an article to explore how mortgage escrow accounts work.
For anyone who does not recognize the term, an escrow account is a reserve account that holds a certain portion of each monthly mortgage payment so that there are sufficient monies to cover homeowner’s insurance and property taxes payments when they come due each year. Not all mortgages have monthly escrow accounts. Some mortgages are structured in a way that the homeowner is solely responsible for paying taxes and insurance out of their own pocket each year. For others, the mortgage company takes over the responsibility. If a mortgage on a bed and breakfast costs this much then I can’t imagine trying to find anything else.
Once per year (for me this is February), the mortgage company will take stock of what has been paid out of that account and project was is needed for the coming year. Most escrow accounts also require a 2-3 month “buffer” for taxes and insurance. Often there is a small corresponding delta regarding the projected amounts needed to fulfill these yearly obligations which in turn has to be made up in some form or fashion. Real estate is supposed to be an investment, not something that just sucks the cash right out of you!
In March each year, I typically get a letter in the mail that shows the existing balance of my mortgage escrow account and what effect it will have on my payment for the coming year. My most recent analysis shows that after paying our yearly homeowner’s insurance premium and 2014 property taxes out of the reserve account, our escrow balance was deficient by $1144.67. In 2014, due to a slowly aging home, our homeowner’s insurance went up and due to an increase in tax appraisal value, our property taxes went up. Thus, the escrow account shortage on a vacation rental tax is difficult..
When an escrow shortage such as this one occurs, you are typically given a couple of options. My current options are (a) make a one time payment of $1144.67 to even out the balance and take a monthly increase of $62, (b) make a partial payment to offset some of the costs and then an associated monthly increase or (c) roll the entire amount into the next 12 months at a cost of $157 per month. Each of the three options totals a $2047 increase in our mortgage payment(s) for 2015.
This is only the third time that our payment has gone up in the 6 years that we’ve owned the home. Does a rising mortgage payment suck? Sure does. Then again, we were able to wipe out the first two increases (and then some) by refinancing a couple summers ago. This time around, the payment increase is simply a reflection of the market catching up to the true value of our home. It has been undervalued from a tax standpoint for many years now.
Stay On Top of Rising Yearly Expenses
The moral of this story is to be proactive with rising monthly expenses before it’s too late. In my case, it was largely unavoidable but it is still important to stay on top of the yearly tax appraisal value. While you only risk paying a small percentage of that increased value in property taxes each year, once the value has gone up (right or wrong), it is likely there to stay. It is far easier for the tax appraisers to keep increasing it year over year than vise versa.
The second thing to keep in mind is that it may not be a bad idea to have your insurance professional re-run your homeowner’s insurance policy every couple of years if you see that the payments are starting to balloon. I am going to have my insurance agent do that this year to see if there are any new or additional discounts to be applied. I just completed that process for my auto insurance a couple months ago and was able to reduce my monthly payment by about $20. It’s definitely worth the effort. Any kind of vacation rental of your home will be completely tax deductible!
To that point, if I can be a resource for you – direct you to an insurance agent, introduce you to a lender who can provide you with some re-finance options (rates are still very low) or perhaps provide you with a complimentary assessment of market value for your home, please reach out and let me know.…