Understanding Escrow Accounts: The Impact of Rising Homeowners Insurance

Homebuyers often believe that a fixed-rate mortgage ensures their monthly payments remain steady. However, these payments typically include principal, interest, property taxes, and homeowners insurance via escrow accounts. Cotality, a property data firm, forecasts that around 65% of escrow accounts will experience shortages due to rising costs, with an average shortfall of $2,157.

Escrow costs have increased by approximately 45% since 2019, with states like Florida and Colorado seeing surges of 70% and 77%, respectively. During the same period, cumulative inflation was about 30%, as reflected by the consumer price index. Selma Hepp, Cotality's chief economist, highlighted that fixed housing cost expectations often overlook escrow account variables.

Mortgage servicers conduct annual escrow account reviews, adjusting for any shortfall over 12 months, which could increase monthly payments. For example, a shortfall of $2,157 results in an additional $179.75 monthly. Borrowers may also opt to pay the shortfall upfront. "Covering the shortfall in one payment can be manageable for those with emergency funds," suggests Stephen Kates, a certified financial planner at Bankrate.

Homeowners' insurance and property taxes have significantly contributed to rising escrow amounts. Insurify.com projects average homeowners insurance costs will climb to $3,057 by 2026, up 4% from 2025. Since 2021, insurance costs have jumped by 46%, driven by severe weather and disasters. Kates advises comparing policies, assessing deductibles, and seeking discounts to mitigate rising premiums.

Meanwhile, property taxes have risen with home values. Cotality reports that taxes grew 27.4% from 2019 to $3,018 in 2024, aligning with a 51.6% increase in home prices. In certain regions, insurance rate hikes are exceeding property taxes in escrow payments. Homeowners may consider appealing property tax assessments if overvaluation is evident. "Appeals should be based on well-substantiated claims," Kates emphasizes. Moreover, exemptions may be available for eligible homeowners, potentially easing the financial burden for those over a certain age.