Real estate Q&A: Can a lender increase monthly payments to cover higher property tax?

Q: We purchased our house last year from a lovely couple that had lived there for several decades. Our bank is taking care of our tax and insurance payments. Our lender drastically increased our payment when the new tax roll came out. This higher payment is hard to swallow as we counted on the old amount when making our budget. Can they do this? — Roland

A: Your mortgage lender requires you to escrow your property taxes and homeowner’s insurance payments, enabling the lender to make the annual payments on your behalf. This arrangement is known as an “impound” account. With this setup, the lender collects 1/12 of the annual payment monthly with your principal and interest payments.

Due to fluctuations in these expenses, the account balance may not always be accurate. If it falls too low, your lender will request additional funds either as a lump sum or spread over the upcoming year. Conversely, you will receive a refund if the balance exceeds the necessary amount.

Given that taxes and insurance costs can change, your lender will maintain up to two months’ worth of extra funds as a precaution against potential deficits.

This predicament occurred because your lender initially set up your impound accounts using the property tax assessment the former long-term owners had paid.

Where I practice law in Florida, there is a strict limit on how much the valuation of a home for property taxes can rise each year. This can lead to a situation where a long-term owner is paying taxes based on a much lower valuation than the property’s market value.

When the property is sold, it will appraise at its current value, causing the property taxes to drastically increase, which in turn causes a significant shortfall in your impound account.

So, here’s the deal. To balance out your impound, you must pay the new, higher amount for the next year along with the shortage from the first year because not enough was collected when you made your monthly payments last year.

The not-so-great news is that you will need to pay your property taxes at the current rate going forward.

But the silver lining is that your monthly payments should even out next year once the shortfall is recovered and your impound account is properly funded.