Mortgage Escrow Shortfall: 12-Month Spread or One-Time Payment?

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Most people who have a mortgage are familiar with an escrow account. In addition to making your monthly payment to the mortgage company to pay off the loan, you pay a little extra to the company which is put into an escrow account. From that account, your lender pays your real estate taxes and homeowner’s insurance.

If you put over 20% down or have over 80% equity when you refinance, you have the option of either having or not having an escrow account. For everyone else, an escrow account is pretty much mandatory.

When you have an escrow account, every now and again due to increases in real estate taxes or insurance premiums, you’ll receive notice from your mortgage that your escrow account is estimated to have a shortfall. In other words, the monthly payment you were previously making is projected to not be enough to pay the bills.

In the notice, your mortgage company will normally give you one to three options. Those are

  1. Increase your monthly payment so that you spread the shortfall out across the next twelve months.
  2. Make a one-time payment for the whole shortfall.
  3. Make a smaller one-time payment and then spread the remaining shortfall out over the next twelve months.

If you do the math on these three options, you will find that they are cost identical when looking one year later. For example, the options might be pay $96 now or pay $8 per month for 12 months (8*12=96).

In the long run, it normally doesn’t matter very much which option you choose.

If you have lots of savings, a healthy emergency fund, and the cash to choose either option, then it probably doesn’t matter which option you choose.

However, I always choose the 12-month spread for one simple reason: If I were ever to fall on hard times such that having the $96 one-time payment or its growth could be the difference between my budget making it for the month or not making it for the month, my mortgage escrow is likely not the place I would have wanted the $96 to go.

I choose 12-month spread so that liquidity stays with me rather than stuck in my escrow account.

For the same reason that a 12-month spread is often better for you, paying your own bills and forgoing an escrow fund is also likely better for you. If you are a responsible saver, keeping the liquidity in your pocket until the bill deadline expands your options for both growth and savings.

Photo by Tierra Mallorca on Unsplash

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Chief Operating Officer, APMA®

Megan Russell has worked with Marotta Wealth Management most of her life. She loves to find ways to make the complexities of financial planning accessible to everyone. Her most popular post: The Complete Guide to Your Washing Machine