Why Did My Mortgage Payment Go Up? Escrow Accounts Explained

Every year I get a few calls from past clients that start the same way: “My rate is fixed, so why did my payment go up?” The answer is almost always escrow. Understanding how it works takes the mystery out of that yearly letter from your loan servicer.

What an escrow account does

Your monthly mortgage payment usually has four parts: principal, interest, taxes and insurance, often called PITI. Principal and interest stay the same on a fixed-rate loan. Taxes and insurance go into an escrow account, and your servicer pays those bills for you when they’re due. In Northern Virginia, real estate taxes are typically due twice a year, so the account builds up between payments.

Part of your payment	Can it change on a fixed-rate loan?	Why
Principal and interest	No	Set by your loan terms
Property taxes	Yes	Assessments and tax rates change
Homeowners insurance	Yes	Premiums change at renewal
Mortgage insurance, if any	Sometimes	Can be removed or set by loan type
Flood insurance, if required	Yes	Premiums change at renewal

The annual escrow analysis

Once a year, your servicer compares what it collected with what it paid and projects the next twelve months. Federal rules allow the servicer to keep a cushion of up to one-sixth of the year’s expected payments, roughly two months, to cover increases. If the account comes up short, you have a shortage. If it has extra, you have a surplus, and a surplus of $50 or more is generally refunded to you.

A worked example: why the payment rises twice

Say your annual property taxes were $7,200 and your insurance was $1,500. That’s $8,700 a year, or $725 a month into escrow. This year, your assessment rose and your taxes went to $7,800, and your insurance renewed at $1,800.

	Last year	This year
Property taxes	$7,200	$7,800
Homeowners insurance	$1,500	$1,800
Monthly escrow for ongoing costs	$725	$800
Shortage from last year ($900 spread over 12 months)	–	$75
Total monthly escrow	$725	$875

Your payment rises by $150 a month, even though the bills only grew by $75 a month. The extra $75 repays the shortage. If you pay the $900 shortage in one lump sum, the increase drops to $75, and next year the shortage portion disappears either way.

What most people miss

• New construction surprises. The first tax bill on a new home may be based on the land only. Once the house is assessed, taxes can jump.
• Assessment notices arrive early in the year. In Northern Virginia, counties mail new assessments in late winter or early spring. Read yours carefully and consider an appeal if it looks high.
• Insurance shopping helps escrow too. A lower premium lowers your payment at the next analysis. Learn more in Homeowners Insurance in Virginia.
• Tax relief programs exist. Many localities offer relief for seniors and people with disabilities, which can lower the escrowed amount.

Can I skip escrow?

Sometimes. Many conventional lenders let you waive escrow if you put at least 20% down, though some charge a small fee or slightly higher rate. FHA and VA loans generally require escrow. If you waive it, you’ll need the discipline to save for large tax and insurance bills on your own.

Frequently asked questions

Why did I get an escrow refund check?

Your taxes or insurance came in lower than projected, leaving a surplus. Servicers generally refund surpluses of $50 or more after the annual analysis.

Does escrow affect my closing costs?

Yes. At closing, you fund the account with a few months of taxes and insurance. These are called prepaids. See Virginia Buyer Closing Costs.

What else should I keep after closing?

Keep your Closing Disclosure and every escrow statement. My checklist is in You Got the Keys. Now What?