Escrow Can Increase A 30-Year Fixed Mortgage By a Lot!Kathleen Celmins
Last year, I bought a condo. I signed the paperwork for a 30-year fixed mortgage. I was comfortable with the amount I was paying. It was a lot, I knew, but it was worthwhile for me because, hey! I was paying my mortgage, not my rent!
The condo itself is gorgeous, and it’s part of a really small building. We only have six units! Everyone is friendly, and since the condos were all priced the same, we’re all in similar life stages. How fun, right?
It’s a new building, too. It was built in 2012, and the taxes were assessed on empty units. For some reason (I think it’s to encourage builders to keep building) the taxes were assessed low when the units were empty, but once the building was full, somehow the assessed value (and therefore the taxes) doubled.
Now, I don’t really understand the mechanics of property taxes. After all, this is the first piece of property I’ve ever owned, and I’m sure my rent was helping someone else pay their taxes in the past, but it was something I never even thought about.
In December, I got a statement in the mail. HOLY SMOKES that’s a big jump in taxes. But it said “this is not a bill” so I decided I didn’t have to worry about it.
Boy, was I wrong.
Learning About Escrow
When I was signing up for my 30-year fixed mortgage, I had to sign my name approximately eight bajillion times. My eyes glazed over several times, and eventually, my realtor sounded a little like the Swedish chef from the Muppets: “hum de bork bork Escrow hurty flurty,” she said. I nodded, having absolutely no clue what I’d agreed to.
Turns out, escrow is an additional checking account for your mortgage, and you pay x dollars a month into it when you pay your mortgage. It’s meant to cover things like taxes and such. But I bought my condo when the assessed value was lower, so the mortgage company’s estimate of my tax bill was off by a couple thousand dollars.
In January, I noticed that the payment to my mortgage company that automatically gets deducted from my credit union had gone up. WAY up. I panicked, and picked up the phone. “Hi, my mortgage went up. It used to be $990 and now it’s $1450 and I think there’s been a mistake! After all, I have a 30-year-fixed mortgage and that means I was supposed to be paying $990 a month for 30 years!” I exclaimed.
The woman on the phone was really nice to me, but she explained what happened. Escrow didn’t have enough money in it, so we have to pay it back, and we have to put more money toward it. I had two options, she said. I could pay the difference (approximately $2k if my memory serves me) or I could pay it over the next twelve months, interest free.
Interest free? I’ll take the payment plan, thank you very much.
But I’m still a little miffed about the myth of the 30-year fixed mortgage. So, first time homebuyers, take heed! Do not make the rookie mistake I made and assume that your monthly payment will be your monthly payment for the next 30 years. Because things will change. Taxes are likely to continue to increase (in my lifetime, no one has ever decreased the property tax!) so if you’re at the maximum you can afford when you crunch the numbers, walk away, or you will end up house poor.
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