When making a mortgage payment, it actually consists of four parts: principal, interest, taxes, and insurance (PITI). Taxes and insurance go into an escrow account. An escrow account is used to cover property taxes, insurance, and mortgage insurance. Escrow shortages can lead to changes in your mortgage payment.
Escrow accounts hold money for taxes and insurance. Mortgage lenders conduct annual escrow analyses to determine the necessary funds. Escrow shortages occur when there isn’t enough to cover tax and insurance bills. Lenders may increase monthly payments to make up for shortages.
If there is an escrow surplus, you may receive a check from the servicer. Escrow surpluses result from excess funds after taxes and insurance are paid. You should pay off an escrow shortage with a lump sum or spread it over 12 months. Escrow requirements may increase due to rising taxes or insurance costs.
Forecasts for insurance and taxes aren’t always accurate. Higher bills may result in a shortage, leading to increased monthly payments. Escrow shortages can be paid off in a lump sum if desired. Escrow requirements may increase due to previous shortages or rising costs.
An escrow surplus may result in a check from the servicer if it exceeds a certain amount. Surpluses are funds left over after taxes and insurance are paid. Escrow surplus checks are typically issued for amounts over $50.
Read more at Yahoo Finance: What is an escrow shortage, and how does it affect my payment?