So you decide its time to buy a house and you're excited because your interest rate is fixed at 3.25%. Your mortgage payment will be cheaper than rent and you won't have to deal with your landlord increasing the rent every year, right? You close and everything is all good until you receive an escrow shortage letter in the mail from your mortgage company. Are your property taxes & homeowners insurance included in your mortgage payment? If so, then your total mortgage payment (including taxes and insurance) may change on a yearly basis (it is not always yearly but it is good to be aware of the possibility). Most mortgage companies offers the option to escrow your taxes and insurance, which allows you to pay 1/12 of these fees every month with your mortgage payment. What you need to keep in mind, is that if the cost of one of these bills increase the next year then your total mortgage payment will increase with it. It is important that you pay attention to your homeowners insurance renewals and your property tax notices (keep them with your important documents) and know when you are supposed to receive them every year. For example, my property tax notice comes around November every year and my homeowners renewal comes in May so I am always checking for it because any changes may affect my monthly budget.
If your homeowners insurance has increased significantly and the reason is not listed in your renewal notice, you can contact them to get an explanation of the new rate. There are several reasons why your homeowners insurance rate could increase, it could be due to the number of claims the company had to pay out for a large disaster, such as, a hurricane or flooding, or the level of risk in your neighborhood has changed, more foreclosures, break-ins or vandalism. It could also be a result of your actions, such as, filing too many claims and your credit. When it comes to filing claims, depending on amount the damage, it may be in your best interest to get a quote before you contact your insurance company. The repair cost may be below your deductible or just a few dollars above your deductible so it isn't worth filing the claim. (Believe me, I had roof damaged that totaled $560 and my deductible was $500, it wasn't worth the increase in premium, they would have charged). As for your credit, your homeowners insurance checks your credit before your renewal. If you credit profile is not as stellar as it was the year before they will increase your rate. Why? Because due to your financial situation you may not keep up with the routine maintenance on the home which causes small problems to turn into large problems.
If your property taxes significantly increases, there are a few factors that may have caused the increase, such as, your local government or schools needs more money. Typically, when there is a shortage in funds, increasing property taxes is the one of the options. Also, it could be due to improvements in the area, like a new neighborhood with more expensive houses, a new shopping center or even a golf course. Home improvements can also cause your property taxes to increase. Did you file for a building permit to finish that basement or update your kitchen? Well, the tax assessor looks at that information too and they estimate the new tax value of your home (I am not telling you to not get a building permit when make improvements to your home, if it's required get one). The best advice I can give you is to contact your tax assessor's office to find out why your taxes increase, it could be due to a mistake on their end. .
You have to launch an investigation each time your homeowners insurance or property taxes increase but if the amount of the increase is so large that you do a double take, you should look into it.
Next week I will post on steps to take to prepare for/cover an escrow shortage
