Nearly half of all respondents to a survey conducted by LERETA, a provider of real estate tax and flood services for mortgage servicers, said they understand how their mortgage escrow account works or how the predicted sharp increase due to rising property taxes will affect them.
The recently conducted study of 1,000 homeowners who had purchased or refinanced their home in the last four years—and also have an escrow account—understood how their escrow accounts work, why it is required of them, and what happens when the price of everything goes up.
According to LERETA, mortgage escrow accounts are used to pay homeowners’ property taxes and related insurance premiums (homeowners, flood and mortgage insurance.) Lenders require them for conventional mortgage borrowers who have 20% or less equity in their home. All borrowers with a federally backed FHA loan must have an escrow account for the life of the loan, no matter how much equity they have. Nationally, approximately 80% of mortgage holders have an escrow account.
The survey’s key findings identified varying levels of awareness of how mortgage escrow accounts work, such as:
- A majority of the homeowners surveyed—more than 80%—said they understand what an escrow accounts is and what it is supposed to do: which is pay taxes and insurance. This makes sense since 57% reported they had experienced an increase in their real estate taxes, and 38% reported they had experienced an increase in their property insurance.
- However, only 52% of those surveyed said they completely understand how their escrow account works.
- More than a quarter (28%) are only somewhat aware or not aware at all that changes in their escrow accounts can affect their monthly payments.
- More than a third (36%) who have a fixed-rate mortgage believe their monthly payment absolutely cannot change, even though it can.
- Of those who have already experienced an increase in their monthly mortgage payment, more than half (53%) were surprised and did not expect it.
Industry watchdogs across the country expect property taxes to increase due to record home price appreciation over the last several years as the average home price has risen 29% since the pandemic began some four years ago and suggests the likelihood of double-digit tax increases for a large number of homeowners. In addition, homeowners’ insurance premiums have been increasing—national average home insurance costs were up 21% as of May 2023. However, in Florida, property insurance premiums have increased by 68% in the past two years and similar high increases have been reported in California, Texas and some parts of the East Coast. Some large insurance carriers have even pulled out of certain states entirely. The lack of competition in these areas is expected to increase the cost of coverage.
In light of these trends, the survey found a concerning lack of financial capacity on the part of homeowners to handle escrow increases. Specifically:
- Half of the homeowners surveyed (50%) said it would be a hardship if their monthly mortgage payment increased by 10%. Nearly 15% said they would not be able to pay their mortgage if their payment increased by that amount.
- If their payments increased by 25%, almost half (49%) said they would not be able to pay their mortgage and another 30% said it would present a hardship.
“The findings reinforce what our associates are hearing every day at our tax service call centers. In 2023, 60% of the calls were related to escrow accounts, specifically shortages due to rising property taxes or insurance costs,” said John Walsh, CEO of LERETA. “With some observers predicting an ‘escrow cliff’ in the coming years, this lack of understanding is concerning. It suggests that homeowners—both with and without escrow accounts—will at the very least be getting some unpleasant surprises. Many will be financially challenged, and some homeowners will need help to make these payments and keep their homes. Our goal is to help mortgage companies increase communications and educational outreach to customers about escrow accounts to help address this looming problem.”
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