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I am in the second year of my 30 year mortgage. I opted to have the bank handle the insurance and property tax payments using an escrow account.

At around the second year mark, the bank sent me a letter saying they are raising the monthly payment (by about 10%) to avoid a possible shortfall in the escrow account. Now, neither the taxes nor insurance have risen and in the cashflow analysis sent by the bank the escrow account never goes negative, the lowest balance by around $400.

My question is, is there any way I can opt out of this payment increase? It is a bit annoying to be forced to set that money apart and it feels a bit disingenuous on the part of the bank: if nothing has changed, then why does the escrow payment need to change? Is this something banks commonly do?

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I can't answer why it would change if your insurance and taxes haven't, but the trend is for taxes and insurance to go up. You're only option to opting out of the increases would be to end the escrowing completely, assuming your mortgage contract even allows it. Since the bank may lose money if your house burns down or is seized by the government for non payment of taxes, many banks require that you escrow. I'd call them though and ask why the rate was changed. My credit union sends a statement showing every escrow transaction and why the rate changed. Since my taxes and insurance premium increase every year, it seems my monthly payment does too. Of course they justify it in my case due to a negative balance in the escrow because they seem to choose to pay the property tax bill a month before its due, but that's another issue.

  • Exactly. If the loan is a small enough percentage of the value of the house the bank may be willing to let you pay those costs directly rather than via an escrow account, or you may be able to refinance into a loan with no escrow... but note that this doesn't actually save you money, it just means that you have to separately make a large payment each year to the insurance company and several to the town. I prefer that, so I have no escrow account. If you have trouble managing savings and cashflow, this may not be a good choice. – keshlam Oct 17 '15 at 17:54

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