You open your mortgage statement and the payment is higher than last year. Your interest rate is fixed, so what happened? Usually, the answer is your escrow account. If you live in Indianapolis, Carmel, Fishers, Noblesville, or anywhere else in Central Indiana, here’s what an escrow shortage means and what you can do about it.
What is an escrow account?
Most mortgage payments have more than one part. Principal and interest repay the loan. A second slice goes into an escrow account, which your loan servicer uses to pay your property taxes and homeowners insurance when they come due.
Most loans include escrow, and some loan programs require it. It spreads two big yearly bills into smaller monthly amounts, so you aren’t hit with a large tax bill twice a year. In Indiana, property taxes are paid in two installments. For 2026, they were due May 11 and November 10.
You funded this account for the first time at closing. (Our closing costs guide explains that part.)
What is an escrow analysis?
Once a year, federal rules require your servicer to review the account and send you an annual escrow statement. They look back at what was collected and paid, then estimate the next 12 months of taxes and insurance.
Servicers are also allowed to hold a small cushion in the account, capped at one-sixth of the estimated yearly tax and insurance bills (roughly two months’ worth). The analysis checks whether you’re on track to stay above that cushion.
Why escrow shortages happen
A shortage means the account didn’t collect enough to cover what it paid out, or won’t cover what’s coming. The most common causes:
- Property taxes went up, often after a reassessment or a change in local rates.
- Homeowners insurance went up at renewal.
- A deduction fell off or was never filed. If you recently bought and didn’t file your homestead deduction, your tax bill can come in much higher than expected. Our Indiana homestead exemption guide walks through how to file.
- Your first-year estimate was based on the seller’s taxes, which may not match yours.
Why your payment goes up twice
This is the part that surprises people. A shortage usually raises your payment for two separate reasons:
- Repaying the gap from last year.
- Covering the higher bills going forward, so the gap doesn’t happen again.
Here’s a hypothetical example with round numbers. Say a Greenwood homeowner’s taxes and insurance rose by $600 a year, and the account came up $600 short. Spread over 12 months, the shortage adds $50 a month. The higher ongoing bills add another $50 a month. The payment goes up $100 a month, even though the shortage itself was only $600.
Your options when you get a shortage notice
- Spread it out. If the shortage is equal to or more than one month’s escrow payment, federal rules don’t let your servicer demand it all at once. It can be spread over at least 12 months.
- Pay it in one lump sum. Many servicers let you do this, which removes part one of the increase. Ask yours how it would change your new payment.
- Check the numbers. Compare the tax and insurance amounts on the statement to your actual bills. Mistakes happen.
- Review your insurance. If your premium jumped, it may be worth comparing coverage and price.
- Confirm your deductions. Make sure your homestead deduction is on file with your county.
What about a surplus?
Sometimes the analysis goes the other way. If the account collected too much and the surplus is $50 or more, your servicer generally must refund it within 30 days, as long as your payments are current.
Not sure what your escrow letter means?
Escrow statements aren’t written for normal humans. If yours doesn’t add up, send it my way and I’ll walk you through it in plain English. You can also run your numbers in our mortgage calculator.
Greg Rank
Senior Mortgage Consultant & Indiana Mortgage Broker
Channelwood Mortgage, Inc.
Call or text: (317) 603-0912
Email: gregrank@mortgagebrokerindy.com
Gregory Allen Rank, NMLS #138276. Channelwood Mortgage, Inc., NMLS #129852.
This article is for general educational purposes and is not a commitment to lend. Loan programs and eligibility requirements are subject to change.