Avoiding Unexpected Escrow Increases

If you have a mortgage, your lender usually pays your property taxes on your behalf at the end of the year. To cover that bill, they collect a portion of it each month and hold it in an escrow account. Understanding how that account works can help you understand or avoid some unpleasant surprises.

Your lender sets your monthly escrow amount based on what you paid in property taxes the prior year, divided by 12. That works fine when taxes stay flat, but if your appraised value or local tax rates go up, your actual year-end tax bill will be higher than what was collected throughout the year.

When that happens, your lender pays the difference and then adjusts your monthly payment going forward to not only collect enough for the next year’s taxes but also spread the repayment of that difference across your next 12 payments… which means a double hit: higher taxes and catching up on the previous year at the same time.

In Texas, a homestead exemption caps how much an appraised value can increase each year — no more than 10% annually. If the previous owner lived in the home for many years, their taxable value may be significantly lower than the home's actual market value.

When you purchase that home, the cap goes away for over a year, although you still get the homestead exemption amount deducted from your taxable value. The appraisal district will reassess the property on January 1, and your taxable value will likely jump to near the purchase price.

Here's the problem: your lender will base your initial escrow on the previous owner's tax bill, the one that reflected their capped, lower value. But your first full year’s tax bill as the new owner will be much higher.

For example: Say the previous owners had a capped assessed value of $250,000, giving them an annual tax bill of around $6,000 ($500/month in escrow). You purchase the home for $400,000. The appraisal district reassesses it, and your new tax bill comes in at $9,600.

That's a $3,600 addition to the escrow amount collected each month that the lender has to cover. Then they spread the repayment back across your next 12 payments ($300/month) while also raising your ongoing escrow from $500 to $800/month to make sure there will be enough for the tax bill that comes at the end of the year. All in, your monthly payment could jump by $600 or more, with little warning.

The following situation is rare but does happen occasionally. John and Stacy bought a newly built home for $400,000, closing in June 2025. Their monthly payment was $2,406: $1,850 for principal and interest, plus $556 going into escrow to cover property taxes and homeowners insurance.

The $556 escrow was based on the prior year's tax bill, which was only $1,875, because at that time, only the bare land had been taxed. No house existed yet.

When the home was assessed for 2026, it came in at $390,000. The tax bill: $9,600! That’s more than five times what had been collected. The lender paid the $7,725 shortfall without initially saying anything.

Then in early 2027, the letter arrived. Their monthly payment was jumping from $1,875 to $3,694.

Here's where that number comes from:

That's a $1,288 monthly increase! (The only ‘good news’ is that $644 goes away after 12 months once the shortfall is repaid.)

The root cause: the lender set up the escrow account based on pre-construction land taxes, with no adjustment for what the full home would eventually be worth.