Each year thousands of unsuspecting homeowners buy new homes to live in. These new homes come equipped with granite countertops, new appliances, the fresh smell of paint and new carpet. At the closing, the borrowers are excited to move into their new home, the home they have worked hard to obtain. Although they do not know it, they are in a huge surprise when the second year of property taxes is due. 

Let me give you an illustration. Bill and Marie bought a home for $200,000 in July of 2007. Due to the home being new, the taxes were on land only, unimproved property. The taxes were calculated by the cost of land times three percent or $35,000 x 3% making the total $1050 per year or eighty-seven dollars per month. All is fine and well until the taxes hit in November of 2008. The new taxes are calculated by the cost of improved property times three percent or $200,000 x 3% making the total new tax bill $6000 dollars per year or $500 dollars per month. Based on the old escrow account the Bill and Marie they would have saved eighty-seven dollars per month times twelve months in the year. They have accumulated $1050.00 but they owe $6000.   They are almost $5000.00 short in their escrow account. If they cannot come up with the money, the mortgage company will gladly pay it for them. 

Therefore, now that the mortgage company has paid their taxes they increase the mortgage payment by $500.00 per month to recoup the money they paid the taxes with and adjust the payment by $413.00 dollars per month to set the new escrow account up correctly. 

Bill and Marie’s mortgage payment just jumped by almost 1000 dollars. Unable to afford the new payment the bank will foreclose and Bill and Marie will move to an apartment. Their credit is ruined and their dream is gone. 

You may be asking yourself how I can avoid this. First, you must deal with a reputable mortgage lender who will take the time to explain how to set up the escrow account correctly. Any time a new  home sells the lender has the option of working with the borrower to set up the escrow account in a manner, which will prevent you from having a shortage. 

They have the choice to set it up based on improved (estimated) or unimproved taxes. It is much better to have too much in your escrow account than not enough. It is best to take care of the situation before problems prevent themselves. Can you afford for a $1000.00 per month jump in your mortgage payment?