Survey Reveals That Many Mortgage Borrowers Don’t Understand How Escrow Works

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A recent survey of mortgage borrowers conducted by LERETA reveals that while more than 80% understand what an escrow account is and what it is supposed to do (pay taxes and insurance), only 52% of those borrowers understand how their escrow account works.

In addition, more than a quarter (28%) are only somewhat aware or not at all aware that changes in their escrow accounts can affect their monthly mortgage payment. 

What’s more, more than a third (36%) who have a fixed-rate mortgage believe their monthly payment absolutely cannot change – even though it can.

This is worrisome, the company says, since mortgage escrow accounts across the U.S. are likely to experience a sharp increase due to rising property taxes and increased insurance rates. Of the survey respondents, 57% reported they had experienced an increase in their real estate taxes, and 38% reported they had experienced an increase in their property insurance.

“The findings reinforce what our associates are hearing every day at our tax service call centers,” says John Walsh, CEO of LERETA, in a statement. “In 2023, 60 percent of the calls were related to escrow accounts, specifically shortages due to rising property taxes or insurance costs.

“With some observers predicting an ‘escrow cliff’ in the coming years, this lack of understanding is concerning,” Walsh adds. “It suggests that homeowners—both with and without escrow accounts—will at the very least be getting some unpleasant surprises. Many will be financially challenged, and some homeowners will need help to make these payments and keep their homes. Our goal is to help mortgage companies increase communications and educational outreach to customers about escrow accounts to help address this looming problem.”

Industry observers expect property taxes across the country to increase due to record home price appreciation over the last several years. The average home price in the U.S. climbed 29% since the COVID-19 pandemic began in 2020, which suggests the likelihood of double-digit tax increases for many homeowners.

In addition, homeowners’ insurance premiums have been increasing—national average home insurance costs were up 21% as of May 2023. However, in Florida, property insurance premiums have increased by 68% in the past two years and similar high increases have been reported in California, Texas and some parts of the East Coast.

Some large insurance carriers have even pulled out of certain states entirely. The lack of competition in these areas is expected to increase the cost of coverage.

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