What’s the best way to deal with an escrow shortage?

If you use an escrow account to help manage the costs of homeownership, you might have recently learned that you have an escrow shortage (again). You’re definitely not alone. Escrow shortages have become more common the last few years as insurance premiums and property taxes continue to rise.

The upside? Once you understand why it happened and what your options are, the situation can start to feel a little more manageable.

Here’s how to navigate this budget buster with more confidence.

Why did my escrow payment go up so much?

Two main factors can cause an escrow shortage—and ultimately increase your mortgage payments:

• Your property taxes increased from the previous year: Counties reassess home values regularly, and many homeowners have seen higher assessments in recent years.
• Your homeowner’s insurance premiums went up: Many insurance carriers nationwide have increased their rates due to higher rebuilding and repair costs, more frequent and severe weather events and other economic factors that have made it more expensive to pay insurance claims.

In some regions, insurance rates have increased by as much as 50%.

Learn more about why insurance rates are rising >

I can’t afford my escrow shortage—what should I do?

First, take a breath. An escrow shortage feels stressful, but you do have options.

At Dupaco Community Credit Union, you have two ways to handle it:

• Option 1: Pay your escrow shortage back in full as a one-time payment.
• Option 2: Spread the shortage out over the next 12 months by increasing your monthly mortgage payments.

“Paying it all off at once may be difficult for some people, so paying it off monthly may be more manageable,” said Michelle Lambert, mortgage servicing manager at Dupaco.

Is it smart to pay my escrow shortage in full?

It depends on your financial situation, comfort level and goals. There are pros and cons to paying it in full.

Here are some reasons people prefer to pay in full:

• It brings your escrow account back in balance right away.
• It keeps your monthly payment closer to what it was before.
• You avoid stretching repayment across the full year.

“Depending on how you want your payments to look and fluctuate, some find it easier to pay their shortage in full to keep their payments as close to what they were before,” said Erin Douglass, mortgage lending consultant supervisor at Dupaco.

But there are also reasons to consider spreading the payments over 12 months:

• There’s no large upfront cost.
• You have more breathing room in your budget.
• It can be helpful if the shortage is too big to comfortably cover in one lump sum.

Keep in mind: Paying the shortage in full won’t save you any money, because interest isn’t charged on the shortage amount. You’re simply deciding when to pay the shortage.

Before you pay an escrow shortage in full, you’ll want to:

• Make sure you have the money to cover it without dipping into your emergency savings. You’ll want to protect your safety net.
• Talk to your credit union to weigh your options.

If I pay my shortage in full, will my mortgage payment go down?

Unfortunately, your mortgage payment will still likely adjust to cover higher expected insurance or tax costs for next year, Douglass said.

Think of it this way:

• Paying the shortage fixes last year’s gap.
• The payment update reflects next year’s expected expenses.

What’s the best way to deal with an escrow shortage?

Start by reviewing your full financial picture. A free Dupaco Money Makeover might help you identify places to save or reduce monthly costs.

Depending on your situation, you may also consider:

• Refinancing your mortgage (or other loans) if it lowers your overall monthly payments.
• Creating a dedicated savings account for future escrow changes.

Request a free Money Makeover >

It’s also a good idea to review your insurance coverage and compare options.

“We want to make sure we’re maximizing all of your possible insurance discounts,” said Andrew Houy, assistant vice president, insurance services at Dupaco Insurance Services. “It’s also an opportunity to help you understand what you’re paying for.”

Request a free insurance quote >

How can I avoid a shortage in the future?

While you can’t prevent rising taxes or insurance premiums, you can reduce the impact:

• Shop around for the best homeowner’s insurance but understand the terms before switching.
• Create a You-Name-It Savings account as a backup fund to help you save for future increases.
• Ask your lender whether you can make occasional extra payments toward your escrow account.
• Review your property tax assessment and consider whether an appeal if it seems inaccurate.
• Watch for your homeowner’s insurance renewal notices so you can catch any rate jumps early and work with your credit union to address the added costs.
• Review your annual escrow statement every year.
• If you’re in a new construction home, save for the first year your home is fully assessed because you’ll see a large tax jump. “Having some money set aside in savings will help offset that shortage,” Douglass said.

Request a free insurance quote >

Are there any escrow shortage mistakes I should avoid?

Absolutely. And avoiding these mistakes could help save you stress:

Mistake #1: Making quick insurance changes without understanding the details

“All insurance carriers and agencies are in the same boat with rising rates,” Houy said. “It’s important to slow down and talk to somebody and make sure you’re getting the service you desire.”

Mistake #2: Reducing coverage or raising your deductible without considering the risks

These options may lower your premium—but increase your exposure.

“And both these options expose you to more risk,” Houy said. “We need to slow down and think about the risks we’re taking versus the short-term financial benefits we might gain.”

Mistake #3: Cashing a refund check from switching insurance mid-year

If you get a refund, confirm whether the money is yours.

“The money might need to be put back in your escrow account to prevent a large shortage,” Lambert said.

Final thoughts

Escrow shortages are frustrating but increasingly common. With a little information—and the right questions to ask—you can understand what happened, choose the best repayment option and set yourself up to be prepared for future surprises.

If you want help reviewing your statement, understanding your options or budgeting for changes, your credit union is here to help.

Request a free Money Makeover >