Looking ahead pays off until “boom”!

This reader story comes from JenB. Some reader stories contain general advice; others are examples of how a GRS reader achieved financial success or failure. These stories feature folks with all levels of financial maturity and income.

I thought I had it all figured out, but the middle-of-the-night panic attacks have started again as a result of a little piece of mail I received this week. You see, I'd finally made the scary decision to quit my job and stay home with our first baby (for at least a year) when — BOOM! — our annual escrow account disclosure statement arrived in the mail.

I didn't even know this could happen, but our mortgage payment is going up $600 a month starting in three weeks with our next payment. “What?” I thought I had looked ahead for every possible snag in my plan. It turns out you may not necessarily see everything that's coming … and sometimes you don't even know what you should be looking for until it arrives in the mail.

The backstory

Here's our story: My husband and I got married in July 2012. In 2013, we chose to fast forward and buy a house and have a baby. We were able to save enough cash for a ring, our wedding, and a 10 percent down payment on our first house, thanks to my husband's lucrative pay structure at work.  However, we knew his income would take a hit when new management took over in less than a year. So we looked ahead and it paid off — we lived simply and saved enough to do the big things we wanted to do and a little extra for an emergency fund.

When the cut in pay came, it was really hard to swallow, but we were in a good place. We had our house, a six-month emergency fund, two paid-off cars, and a small student loan that I have been chipping away at steadily. We wanted a baby right away because, while I'm still seriously young, according to the doctors I'm of advanced maternal age. Despite that, we were blessed with a baby boy at the end of 2013. I teach outdoors in my full-time job and we live where there are cold winters, so I make all my money from April to November, even though I collect a small salary year round. Having a baby in September was great because I was off work until March of this year.

Then — “BOOM!” — my company was bought out in December and my new company was not exactly tolerant of my relaxed winter schedule. As they pushed me to come back to work earlier and I attempted to juggle the baby and working more with occasional help from my in-laws, it hit me that I really wanted to stay home with this adorable guy all day long instead of going back to work, at least for the first year. I feel like I've waited my whole life to have this baby in my arms and I'm not ready to turn him over just yet. I wish I would have seen that coming!

That's when I tried to see if quitting my job was feasible now on my husband's reduced salary. We could have done things a lot different if this was our plan from the beginning — smaller ring, smaller wedding, smaller house — the list goes on. But that's a whole other article that young people won't listen to anyway. (You have to make your mistakes, right?)

So I whittled away at the budget, figured out how to bring in a part-time income with a side business to cover the shortfall, and faced the sacrifices I'd have to make in luxuries — done.

Then that dreaded letter arrived. I cried after reading it. Apparently, we had a shortage in our escrow account after the first year of our mortgage that resulted in the mortgage company increasing our payment by $600 a month. It seems to be a result of our county property taxes being higher than anticipated when we closed on the house. From what I've read, that often happens on new construction because the original estimates are based on the land, not including the dwelling you've built on it. I had already figured out how to bring in an additional $800 a month working part time (while the in-laws watch the baby twice a week).

Where am I going to find another $600? Well, I don't have the answer quite yet. Here's my plan to start:

  • I'm going to call the county tax office and confirm that our mortgage company has properly estimated our 2014 property taxes.
  • I'm going to see if the entire escrow shortage and extra cushion can be paid in full up front and not added to our monthly mortgage payment. (Goodbye tax return.)
  • I'm going to research at what point our PMI can be removed from our mortgage. (We needed a 20 percent down payment to avoid this in the first place.)
  • Then I'm going to call the mortgage company and see if they can spread the amount over a longer period of time, like 24 to 36 months instead of just the 12-month period.
  • Finally, it's back to the drawing board to see where I can squeeze in a few more part-time hours to make up the difference OR where I can sell some things to bring in extra money (like the boxes of hockey cards hidden under the bed).

If anyone has suggestions for how to tackle (avoid) such a hit from the mortgage company, I would love to hear them. I have one month to figure it out before I'll be expected back at work full time. Hopefully there aren't any more surprises!

More about...Career, Home & Garden, Planning, Taxes

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Ray
Ray
6 years ago

1. Investigate what real estate taxes neighbors with comparable homes are paying. If your taxes are not in sync look for an appeal process
2. Look to see how much of the new mortgage payment is for catch up on last years short fall. then you can plan accordingly.

JenB
JenB
6 years ago
Reply to  Ray

Thanks Ray… I will look at both of those things.

Beth
Beth
6 years ago

Ugh. This happened to a friend of mine this past year. The house they bought was brand new, so the taxes weren’t properly estimated and the bank didn’t pick up on the difference. (Ah, the effects of fewer and fewer staff…)

Unfortunately, there was no way for them to fight it so they just took the money out of their savings and paid it off in a lump sum. It’s a mental math sort of thing: they would rather pay themselves back than deal with the issue every month.

Good luck, and congrats on the little guy 🙂

JenB
JenB
6 years ago
Reply to  Beth

thanks! on the notice we received it says we can pay for the previous year’s shortage in lump sum, but our payment still goes up $300 per month based on their estimated taxes for 2014. I hear it’s happening a lot. since I got the notice I’ve heard from 2 friends in the same boat – both new construction.

jon urbanski
jon urbanski
6 years ago

Where I live there are small windows where you can appeal your property taxes. Also make sure you are getting taxed as a occupying home owner, taxes are higher when you own a rental or vacation property, so make sure the county has that listed correctly. Your taxes are typically paid 2 times a year, so I don’t think they’ll let you extend your escrow past 1 year… nor should you. Good Luck.

Jessica
Jessica
6 years ago

You should be able to pay the full escrow difference up front. Our mortgage company allows us to do this, and we have taken advantage of it before to keep our payments lower. Note that this huge escrow hit doesn’t happen only with new construction, but can also occur where values have increased significantly while the owner has remained the same. The mortgage company estimates your review at closing based on the previous owner’s tax payments, but if they have been in the home 65 years like our home’s previous owners were, then due to caps on property tax increases,… Read more »

Brian @ Debt Discipline
Brian @ Debt Discipline
6 years ago

Sounds like you’re on the right track with your plan. If you are receiving a large tax return each year. maybe make an adjustment in your deductions so your have that extra money each month, instead of loaning it to the Government and getting it back at the end of the year.

Daniel@youngandfrugal
6 years ago

The exact same thing happened to me on the escrow. I called and got it split out over 3 years as a 0% loan. That way it only increased my payment by a couple hundred. Then a few months later I refinanced, and our neighborhood had been built up enough and rates had fallen enough so that I was able to pay it off with a refi AND lose PMI AND mandatory escrow. And my payment fell overall. Of course this was back in 2009 when rates had fallen drastically from 2008. I could only imagine the pain if it… Read more »

meoip
meoip
6 years ago

Look at changing insurwnce if you change insurance male sure to apply the refund to escrow don’t just pocket it. Every year you have a house it is a year older so rates change. Don’t prepay the entire thing. Set up some laddered CD s and earn a bit of interest. When you do wade into the property tax world understand it is a convoluted mess. Attached decks are taxed different than unattached decks. Basement rooms (bedroom) with windows are different then those without windows (not bedroom) so try dry walling over basement windows if no one is sleeping in… Read more »

Beth
Beth
6 years ago
Reply to  meoip

Interesting point about investing, but make sure you aren’t paying interest on the money first.

In my friends’ case, the bank paid the insurance upfront and then wanted to charge them an extra $xxx per month on top of their mortgage. (I somehow doubt that was an interest free loan!) They paid the bank back upfront.

lmoot
lmoot
6 years ago
Reply to  Beth

That sounds like they are just collecting escrow. I don’t think they pay interest for escrow, but I doubt they charge interest. The money the bank “paid” up front was likely escrow money from when your friends first bought their house. Usually at closing the bank will require at least insurance up front, and the taxes they can adjust (like what happened to the OP). But unless something MAJOR has changed since I last bought a house, mortgage holders typically only charge interest on the principle portion of a PITI payment, not taxes and insurance. And I agree with the… Read more »

nicoleandmaggie
nicoleandmaggie
6 years ago

Our escrow changes every year– they charged us more than they should have in property taxes right off and since we had the sale price of the house, we were able to say hey, this is what our hose is worth. A couple years later when it went way up we had just refinanced and had a home inspection for the market value. They didn’t lower it one year we protested when we didn’t have hard evidence like a recent sale price or home inspection. Most years though they seem to be on track and it has gone down a… Read more »

JenB
JenB
6 years ago

thanks, I will check the homestead exemption – haven’t heard of that before. we’ve been in the house a year as of February. being home part time would def be a luxury (and temporary as I really like what I do too).

Vasiliy
Vasiliy
6 years ago

Just curious – what does your escrow cover? Property taxes and insurance? It seems pretty high to an extra $600 per MONTH. That’s $7,200 a year. We’ve owned two houses so far. They are about 2K sq ft. One (we sold it when we moved to the second one) had insurance of about $600 per year and property taxes of $1,500, so $2,100 a year. Another one is $700 for insurance and about $5-6K for property taxes, so about $6-7K a year. Both are located in mid-west cities. So, having another $7,200 on top of what you have already been… Read more »

John
John
6 years ago
Reply to  Vasiliy

I’m assuming they have to pay back escrow on the underpayment for the previous year plus an uptick in the current year.

I.e., escrow will drop the following year (though to a higher rate than the first year).

Laura
Laura
6 years ago

“(You have to make your mistakes, right?)”

I just wanted to say – it’s only a mistake if you had better data and didn’t act on it. You said you didn’t realize how deeply you would want to be a SAHM. That means you didn’t have that piece of data when you made your plans, and thus you didn’t make a mistake in your plans.

It sounds to me like you made really good choices based on the information you had at hand. You’re only as a good as your information.

El Nerdo
El Nerdo
6 years ago
Reply to  Laura

Laura, yes, what you say about information is true, but I have to disagree (in a non-judgy, non-moralistic way, rather as a matter of the decision-making technique) that there was only one way to deal with their information. I know nothing about mortgages, so I can’t offer advice in that regard, but having learned a bit on decision-making theory (and being willing to learn more) I can reasonably say that the information can be treated in different ways, which can make a big difference in our decisions. Dan and Chip Heath’s “Decisive,” explains the various traps of decision making and… Read more »

MelodyO
MelodyO
6 years ago
Reply to  El Nerdo

Very interesting post! I’m going to add that book to my list to read. :0)

Laura
Laura
6 years ago
Reply to  El Nerdo

Thanks, El Nerdo, for the thoughtful reply. The funny thing is, “Decisive” is sitting right here on my desk next to me, LOL. But I haven’t yet had time to read it. After your post, I think I should bump it up my reading list to get to it sooner than later. Thanks for your reply and the book recommendation; it sounds like you have a piece of information (on decision-making) that I do not. 😀

Karl
Karl
6 years ago

Something similar happened to us recently. We bought a charming, though fairly run down property in the historic district with the intent of repairing it. Before we bought, I factored in that property taxes may increase at 2-5% per year and a whole bunch of other factors before deciding to buy. What ended up happening is that the county reaccessed and decided that 88% of properties were going up, and ours got a 17% boost! I considered appealing, but it seems pointless if every house in the same planning zone saw similar increases.

Emily
Emily
6 years ago

we had this happen to us, but not $600 more / mo! I would absolutely call the county to see what could be done. As for the bank, yes, they usually will take a lump sum payment to make up for the shortfall, but will still increase your monthly payment to make sure you don’t run into a shortfall again the following year. You might not see a $600 decrease, but it should be slightly lower (maybe $300-$400). From my own experience, the first year you’ll have an escrow shortage, then the 2nd year it’ll be an overage & you’ll… Read more »

Mike B.
Mike B.
6 years ago
Reply to  Emily

My experience is that it’s *usually* a shortage, because they calculate your payment based on last year’s property taxes, but taxes don’t (often) go down. So you make your payments based on the old amount, they pay the new amount, bill you for the difference, and adjust your payment to cover the new amount — but the next year, it’s even more and the cycle repeats.

Laura
Laura
6 years ago
Reply to  Mike B.

This has been my experience so far to date, although we’ve only had the house about 5 years.

I’m not sorry we bought a house given the relatively good deal we got and the dismal cost of renting in the Boston area, but I REALLY wish this information about escrows and shortages based on taxes was provided upfront to new buyers! It’s not, and it would have helped us a lot to have known about it ahead of time.

Coco
Coco
6 years ago

Your lender should gladly accept a deposit from you into your escrow account to cover the shortfall. Contact the lender to determine the amount of the shortfall for the previous year’s taxes and offer a lump sum payment that is designated to retire that shortfall. Also ask the lender what the amount of the additional monthly escrow deposit will be once that prior shortfall is paid. You can then determine whether (a) it’s an amount your family can handle each month, (b) you would prefer to use any remaining proceeds from the tax refund to cover some or all of… Read more »

JenB
JenB
6 years ago
Reply to  Coco

coco- good suggestion on using tax refund to reduce principal and get rid of PMI as a result. i’m looking into this option now as well.

E
E
6 years ago

At least in my state, the county’s tax valuation of your property can be appealed, generally without the necessity of hiring a lawyer. I know someone who does it every year and he usually gets them to lower the value at least a little bit. It’s not immediate though, so it won’t change the escrow amount for awhile, but it’s definitely something that could help in the long run.

Anne
Anne
6 years ago

This is only my opinion, but I think you should find a way to stay home. I don’t believe you will ever regret it.

Gary Schmitt
Gary Schmitt
6 years ago

You should have the option to pay off the escrow deficiency all at once or spread it out.

You should also check into reviewing/challenging your assessment. You can use zillow.com to review the market values of comparable houses.

cherie
cherie
6 years ago

when this happened to us the FIRST THING I did was to arrange with the mortgage holder for US to pay the taxes and insurance on our own. They want a ‘cushion’ which I found unreasonable – and I have happily kept track of all this in the past decade or so without trouble – it allows us to change our insurance without a hassle and to appeal our taxes. The second thing I would do is find an attorney who will appeal your taxes – depending on where you live it can be alot of effort to collect all… Read more »

JenB
JenB
6 years ago
Reply to  cherie

wow, Cherie, good advice… I think I could handle paying the taxes on my own – a copy of the bill comes to me anyway – and the insurance is through my preferred provider anyway. Can you change this with your mortgage company at anytime? And, could I go back to having my mortgage company do it in the future if there were ever a reason to? I like the idea of not paying them the “cushion.”

Carol
Carol
6 years ago
Reply to  JenB

We’ve had several mortgage lenders. None would let us drop escrow without paying a fee. The fees far outweighed any interest I could make on the money myself. Wells Fargo actually paid interest on our escrow account.

Vasiliy
Vasiliy
6 years ago
Reply to  cherie

Good point about trying to avoid the escrow account if (a) you can “save” every month to make sure you have enough to pay insurance and taxes when they are due ad (b) it is possible (sometimes, e.g., when more than 80% of home equity is outstanding, the bank doesn’t allow you to go without an escrow account). Paying 20% or more helps in this situation; this will also help to avoid PMI (which is a rip off by banks if you were to ask me). On a separate note, some companies advertize paying your mortgage twice a month which… Read more »

Mark Battle
Mark Battle
6 years ago
Reply to  cherie

@ Cherie, Bravo, I too, had this happen to me, although not as large (only $67.00 which I promptly went down to the Bank of Leechdom(BofA)) and paid. I just finished doing my 2013 taxes and found out that my Insurance for my house for the year was only $436.00 of which I easily make enough(thank you GOD for my job…)So tommorow I will go to and/or call BofL and inform them that I will be taking the Insurance payment off my escrow account and be paying it in person. In addition I will ask the Insurance company to help… Read more »

JenB
JenB
6 years ago
Reply to  Mark Battle

Agreed Mark. I’m going to do the same. Thanks to Cherie

Mark Battle
Mark Battle
6 years ago
Reply to  cherie

@Cherie,
Cherie, 1 more ? for you. Where can I find a lawyer who can appeal MY taxes..?? I realize that as lawyers you and your husband have many multiple contacts. That being said, I would like to explore this avenue as well. Any ideas..??
Thanks

JenB
JenB
6 years ago

Thanks for all the good info, everyone. John said it right, we have a shortage to make up for 2013, plus the increase for 2014, hence the $600/month payment that includes PMI, homeowners insurance, and escrow. We chose our homeowners insurance policy ourselves (not the mortgage co recommended) and think that’s not the issue. There’s nothing we can do about the PMI right now, we’ve only been in the house one year. However, we did find out that the mortgage company way over estimated 2014 taxes (by about $4K) and are waiting to hear back on our protest. We can… Read more »

Nick Summy
Nick Summy
6 years ago

This sort of happened to me, not the problem with the escrow but with the property taxes increasing quite a bit. Someone should have explained this to you. The first 2 years your property taxes are extremely low. After that they jump to the normal price. You should have anticipated that or known something wasn’t right. No use crying over spilled milk though. Might I suggest that you not escrow? I put my monthly tax payments into a seperate account and then pay my property taxes every 6 months. You can earn interest and are not trusting taxes to a… Read more »

Mrs. PoP
Mrs. PoP
6 years ago

Step 1 – Figure out what your property is being assessed at from your county- if it’s significantly different than what you paid for the house, or what the value of the house currently is, find out about the appeal process. Ours was wrong, we appealed and cut our assessed value by over $100K, which dramatically lowered our taxes. Sidenote – Don’t forget to check for any necessary applications for homestead exemptions. Lots of people in our area forget to do this and are overpaying taxes every year as a result. Step 2 – If you are appealing, talk to… Read more »

PawPrint
PawPrint
6 years ago

We had our escrow account go up dramatically (at least I felt it was dramatic), then at the end of the year, they returned the money they’d collected because they’d taken too much. What a racket! Ever since that, I won’t use an escrow account. However, with the last two home purchases I have had to set one up at closing because the banks will charge you for not setting up an escrow account–yet another racket, IMHO. I dutifully set one up, go through closing, then shut it down. I set up Smarty Pig accounts and transfer what I would… Read more »

Sean
Sean
6 years ago

Just go back to work for a few months and pay it off. OR, sell your engagement ring since you place more value on staying home than working and living securely. Whats worth more, a silly little rock or your time at home with your child? If your savings can’t cover the extra $7,000 you should never have quit your job to begin with. Your poor husband has all this pressure on him…

JenB
JenB
6 years ago
Reply to  Sean

Thanks for the perspective Sean. Yes, I’m sensitive to the pressure my husband will feel as the primary breadwinner for our family. Luckily for me he’s on board with our plan, and we’ve agreed that at any point it’s not working I will go back full time immediately (I’ll be working 3 days a week in the meantime). If we ever got into a dire situation we would sell not just my ring but whatever it took. We can pay the escrow up front without using our emergency fund, but the shock of $600/month more going out the door did… Read more »

Mike B.
Mike B.
6 years ago

We’ve been there. When we bought our house, the escrow payment was calculated based on the previous owner’s senior exemption, which we didn’t qualify for in our 20s. 🙂 Then the bank turned around and calculated a huge payment, which also didn’t make any sense. We ultimately had to write them a letter enclosing copies of our property tax bill and our homeowner’s insurance bill and explaining to *them* what the escrow amount should be every month. Funny how they turned around and sent us a third version proposing a new escrow payment that was within a dollar of what… Read more »

JenB
JenB
6 years ago
Reply to  Mike B.

Always two sides to every story, right. I don’t want an interest rate increase and be handling all the paperwork to pay the property tax and insurance myself. The interest rate increase would defeat the purpose I feel like

JohnD
JohnD
6 years ago

JenB We’ve looked into our PMI recently because we would like to get rid of it to help with my wife staying home. What we came up with here (upstate/central New York) is that you need at least 20% equity in your home (which you know) and it has to be at least 5 years since you opened the mortgage. We’re expecting our second child in about 6 months and are going through the battles of balancing our budget to accommodate. My wife has had that SAHM push with both kids and it’s never really a foreseen thing (well, maybe… Read more »

PB
PB
6 years ago

When we moved our mortgage to another bank, I set up a separate savings account as an escrow account and had regular paycheck deductions put into it so we can pay our own taxes and insurance when we want to do so. This means that in even numbered years, we make TWO property tax payments, one in January (grace period until February) and one in December, for the previous and current years respectively. Our CPA advised us to do this in order to increase what we can deduct in even numbered years (I don’t completely remember the reason, but it… Read more »

David S.
David S.
6 years ago
Reply to  PB

Most likely you didn’t have enough itemized deductions to overcome the standard deduction or the larger deduction would bring you down to a lower tax rate.

Ely
Ely
6 years ago

Our escrow went up every year – never $600 all at once, but still it was a hit. We cancelled the escrow account and paid our taxes and insurance ourselves. The bank kept a ‘cushion’ in the account of almost $2000, which was put to much better use in an interest earning ‘cushion’ account of our own. That way also we got the bills and didn’t have to worry about the bank making a mistake that we would suffer the consequences for.

David S.
David S.
6 years ago

This is the main reason why I don’t have escrow. I hated the constantly changing payments for a fixed rate mortgage and of course they can have 1/6th of the total amount for the year in “reserve”. So I just had them drop it. Now I go through the year with my own escrow account that I adjust every February since that is when the property tax statements are mailed out. Though it is funny when I check my mortgage statement, there is always the message: “Our records show that you don’t currently have an escrow account. To help ensure… Read more »

sarah @ little bus on the prairie
sarah @ little bus on the prairie
6 years ago

Thank uou so much for this article. We are about to build and now I will be sure to check that the taxes are properly estimated!

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