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Understanding and Managing Escrow Shortages

When you purchase a home, O1ne Mortgage typically sets up an escrow account to manage your property taxes and homeowners insurance payments. Each month, a portion of your mortgage payment is directed into this account to ensure there are sufficient funds to cover these expenses when they come due.

What Is an Escrow Shortage?

An escrow shortage occurs when the funds in your escrow account are insufficient to cover your estimated future taxes and insurance. Even if there is money in the account, it is considered a shortage if it does not meet the required amount to pay these bills.

In contrast, an escrow deficiency means your account has a negative balance, which can happen if your lender has to cover the shortfall for your tax and insurance payments. Conversely, an escrow surplus occurs when there are extra funds in your account, often resulting in a refund if the surplus exceeds a certain amount.

What Causes an Escrow Shortage?

Escrow shortages often arise from increases in property taxes or homeowners insurance. For example, if your property taxes increase from $2,000 to $3,000 annually, and your insurance rises from $1,200 to $1,500, this $1,300 increase can lead to a shortage in your escrow account.

How to Fix an Escrow Shortage

Upon completing an escrow analysis, your mortgage servicer will provide a report detailing any shortage. You typically have three options to address this:

1. Pay the Full Shortage Now

Make a lump-sum payment to cover the entire shortage. Note that even with this payment, your monthly mortgage payment may still increase if your taxes or insurance costs have risen.

2. Pay the Shortage Over the Next 12 Months

Spread the shortage amount over your monthly payments for the next year. This option is useful if you cannot pay the full amount upfront.

3. Pay Part of the Shortage Now, and the Rest Over the Next 12 Months

Combine the previous two options by making a partial payment upfront and spreading the remaining balance over the next year.

How to Avoid an Escrow Shortage

While it may be challenging to avoid an escrow shortage entirely, staying informed about changes in your property taxes and insurance rates can help you prepare for additional costs. Consider adding extra funds to your escrow account if you anticipate higher bills or if your expenses tend to increase annually.

The Bottom Line

Having a mortgage with O1ne Mortgage likely means you have an escrow account to manage your property taxes and insurance payments. If these costs increase, you may face an escrow shortage. You can address this by paying the shortage in full, spreading it over a year, or a combination of both. Staying on top of your mortgage and escrow payments is crucial for your financial health.

For any mortgage-related needs, feel free to call O1ne Mortgage at 213-732-3074. Our team is here to assist you with confidence and expertise.

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