Yikes!! How can my mortgage payment jump like that ????
I just got my Christmas bills, my daughter needs braces, my car needs an overhaul and now this ???
Every year, sometime in the first quarter, homeowners with a mortgage on their house get a letter from their mortgage company. It is an accounting of what went into and what was paid out of their escrow account over the past year.
If more went out than in….. well – let’s just say that is never good news. Most of the time it’s not a shocker. But it can be. Let’s examine some case studies to understand what can happen.
But first, some basics. Your house payment is made up of the principle and interest portion and the escrow portion. The principle and interest is fixed for the loan term unless you have an adjustable rate mortgage. Your escrow account is a reserve fund which you pay into each month so that when the taxes and insurance are due, there is money there for the lender to pay those timely. Your annual insurance premium is usually fairly stable but does drift up over time and is much lower than the property taxes. However, property taxes are another matter!! They are a function of your property value and the tax rate. Your property value is set initially by the Central Appraisal District of your county in April and, unless you challenge it, is certified at that value in July (more on that later). The tax rate is set by the taxing entities themselves (ISD, City, County, etc.) and that rate is set in October-November. Multiply the taxable value by the rate and you have your tax bill. The combined tax rates for city, school, and county vary but fall in the range of 2% to 3% of the taxable value. Most cluster around the middle at around 2.5%. So, for a house with a taxable value of $400,000, the taxes are going to be about $10,000/year in most urban-suburban locations in Texas. That requires a monthly installment of $833 to have $10,000 in the account when the taxes are paid at the end of the year. But back to that 1st quarter letter you will get from your lender. The lender projects the monthly escrow payment to cover your taxes for the next year based on last year’s taxes. So, if last year’s taxes were $10,000, you will be paying $833/mo this year to cover that tax bill at the end of the year. Now, let’s suppose that, after the payment has been set for the year, you get your notice from the appraisal district and they think your house is now worth $440,000, a 10% increase. If you don’t challenge it, your lender will now be paying $11,000 in taxes at the end of the year on your behalf. Woops…. You only have $10,000 set aside. The good news is that your lender will pay the full amount, but next year, you’re not going to like that 1st quarter letter from the mortgage servicer for two reasons: First, they will be telling you that you have a $1,000 shortage in your escrow account. Most lenders will let you make up that shortage over the next year. That adds $83/mo to your payment. Second, since your taxes are now $11,000/yr you have to pay another $83/mo to make sure you have $11,000 in the account at the end of the year. That’s an extra $166/mo. Factor in a small increase in your insurance premium and you are looking at a $200/mo increase in your house payment! The good news is that the first $83/mo increase to cover the shortage, goes away at the end of the year…. unless.. you guessed it… your taxes go up again!!
What can you do about this? Research savings opportunities and if you discover an opportunity to lower the value, then challenge the value. You may not be able to stop the increase completely but at least put a drag on it. You’ll be getting your 2019 value notice around April 15 and there is a 30 day window to challenge it – usually until May 15. To make sure you don’t miss the deadline, be sure to sign up with propertytax.io in the window to the right.
Stay tuned for next week’s adventure – we’ll see how an escrow payment reset can be enough to wipe out a car payment!