John and Mary bought a new home last year for $400,000, with construction beginning in late January 2023 and closing in June 2023. Their mortgage payment was set at $2,175 per month, which included $1,850 for the principal and interest and $325 for an escrow account covering property taxes ($1,875/year based on the previous year's taxes) and homeowners’ insurance ($2,000/year).

They were excited to see the new home being valued at $390,000 for tax purposes in 2023, lower than their purchase price, and their monthly payments remained the same throughout the year. However, at the end of 2023, the actual tax bill was $9,600, significantly higher than the $1,875 allocated in their escrow. Basing the original escrow payment on the taxes for the year before purchase, which was only on the land in this case, created a $7,725 shortfall, which the lender covered without initially informing John and Mary.

In February 2024, they were shocked to learn that their monthly payment would jump from $2,175 to $3,295 to cover the forecasted higher tax obligation and repay the shortfall. This was a $1,120 monthly increase, with $800 now going towards taxes and an additional $645 to repay the lender for covering the balance of the tax payment the previous year.

The issue arose from the lender's initial setup of the escrow account, which didn't account for the significant changes new construction (or home improvement) can bring to property taxes. While John and Mary also bear some responsibility for not questioning their escrow account, a more proactive approach by the lender or their agent could have prevented this situation.

Other factors that can lead to escrow account issues include:

Homeowners should be advised to actively engage with their lenders about potential increases in tax assessments and set aside additional funds if they anticipate higher taxes. Choosing PropertyTax.io to challenge tax value increases every year can also help manage escalating costs.