On a Tuesday last December, a homeowner in Colorado opened a letter from their mortgage servicer. The monthly payment was going up by $312. The rate was fixed at 3.25%. The culprit: an escrow shortage.
That homeowner is not alone. This year, about 65% of escrow accounts are projected to be short, according to Cotality, a property data and analytics firm. The estimated average shortage is $2,157. For a borrower with a $1,800 monthly principal-and-interest payment, that is a 10% increase overnight.
Escrow accounts collect property taxes and homeowners insurance premiums alongside principal and interest. About 80% of mortgage borrowers have one, per Lereta, which provides tax and flood data to servicers. Those without pay taxes and insurance directly.
The mechanism is straightforward. Servicers review the account annually, compare what was collected to what was paid out, and project the next year's costs. If the account is short, the lender spreads the deficit over 12 months. The result: a higher monthly payment on a loan marketed as fixed.
Escrow costs have risen roughly 45% since 2019, per Cotality. Cumulative inflation over the same period was about 30%, based on the consumer price index. Housing-specific costs are outpacing the general price level by 50%.
In some states, the divergence is extreme. Homeowners in Florida have seen escrow costs jump 70% since 2019. In Colorado, the figure is 77%. Those are not inflation adjustments. Those are structural shifts in the cost of shelter.
The two drivers are property taxes and homeowners insurance. The average annual property tax bill was $3,018 in 2024, up 27.4% from 2019, per Cotality. Home prices rose 51.6% over the same period. Tax assessments lag but eventually catch up.
Homeowners insurance is accelerating faster. The average annual premium is projected to reach $3,057 by the end of 2026, up 4% from $2,948 in 2025, according to Insurify.com. Since 2021, premiums have risen 46%. Severe weather and natural disasters are the cited causes.
Selma Hepp, chief economist for Cotality, put it plainly: Over the last couple of years, we've seen surges in insurance and property taxes. In some areas, insurance has grown so fast it is outpacing property taxes as a share of escrow.
For borrowers, the options are limited. Pay the shortage as a lump sum, or spread it over 12 months. Certified financial planner Stephen Kates of Bankrate recommends the lump sum if the emergency fund allows. Paying over time, he said, can leave you layering shortage payments on top of higher ongoing monthly payments created by the updated escrow calculation.
The broader implication for capital markets is uncomfortable. The fixed-rate mortgage has been the bedrock of U.S. housing finance for decades. It transfers interest rate risk from borrower to lender. But it does not transfer property tax risk or insurance risk. Those are passed through directly.
As climate risk reprices insurance and local governments raise property taxes to fund pensions and infrastructure, the pass-through is becoming material. A borrower with a 3% fixed rate and a $2,000 monthly payment could see that payment rise to $2,200 or $2,400 purely from escrow adjustments. The mortgage is fixed. The housing cost is not.
For mortgage servicers, the administrative burden is rising. Each shortage requires a letter, a calculation, a collection plan. For investors in mortgage-backed securities, the credit risk is unchanged, but the borrower's cash flow is squeezed. That squeeze shows up in credit card delinquencies and auto loan defaults before it shows up in mortgage non-payment.
The 65% shortage rate is a lagging indicator. It reflects costs that have already risen. If insurance premiums continue to climb and property taxes follow home values upward, the share of escrow accounts in deficit will grow. The average shortage will widen.
Homebuyers, Hepp said, often think of a 30-year fixed-rate mortgage and think of it as housing costs being fixed. That assumption is breaking. The fixed-rate mortgage still fixes the rate. It no longer fixes the payment.