Why did my mortgage payments go up so much in the past year?

If you are like many people, you have a fixed-rate mortgage, which means that your principal and interest totals don't change from year to year. Then why did your mortgage payments seem to jump $300-$500 more in 2008?

Blame our friend Mr. Escrow, and his pesky pals Mr. Rising Homeowners Insurance and Mrs. Out-of-Control Property Taxes.

You see, your mortgage lender has two big concerns: making sure you pay your taxes so the guvmint don't take your house, and making interest off of you. Well, actually, one big concern when you boil it down: making money.

The escrow payment on your monthly mortgage bills lets your lender set aside enough money to pay annually your property taxes and homeowner insurance. Lenders calculate this additional escrow payment only once a year, taking their estimate of your insurance bill and property taxes, adding them together and dividing by 12. That number is then added to your principal and interest to get your monthly mortgage payment.

What happened this year for many people is that lenders didn't take enough money for escrow throughout 2007 (who would've figured the skyrocketing costs of insurance and taxes?) and ended up with what is known as an escrow shortage. So when you bemoan your higher escrow payment, consider that it not only reflects higher insurance and taxes for 2008, but also the 2007 escrow shortfall that your mortgage lender so kindly covered for you.

Damned nice of them, huh?

"Florida is in a very unique situation," said Patrick Hellman, the senior vice president for servicing operations for Wells Fargo Bank. "We've seen taxes go up over the last several years. The advantages of those customers having an escrow account is that we can make those shortages into smaller, monthly payments" instead of forcing the homeowner to make one large, lump-sum payment. In some cases of financial hardship, it may even be possible to spread out those shortage payments longer than 12 months, he said.

Your lender's willingness to carry your escrow debt gratis is not entirely altruism. The lenders make interest off your escrow payments that build up throughout the year. Wouldn't it be better for you to hold onto your own money and make that interest instead? For some homeowners, the answer is yes. But the time to decide that is when you sign your mortgage documents. And some loans — those underwritten by the VA or FHA or where there is less than 20 percent equity in the home — require an escrow.

Hellman said lenders such as Wells Fargo have lots of customer service reps on hand to answer escrow questions and tell you if you are eligible to have your escrow recalculated (in case your insurance or taxes have, for some reason, dropped and the lender isn't aware). And Hellman recommends escrow, since it keeps your lender on the hook for paying your taxes on time (avoiding $$$ penalties) and not you.

Your choices: pay the shortfall in one lump sum, refinance your loan and get rid of your escrow (if you qualify), or prove to your lender that their figures and calculations are wrong.

Why do those seem easier than attacking the root cause of higher escrows: rising property taxes and homeowners insurance bills?

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