How to Avoid a Mortgage Escrow Nightmare

• If you can swing it, you might decide just to pay the extra $400 each month, knowing that shortage will be paid off over the next year, and your monthly escrow payment can be expected to go down roughly $200 the following year.

• You could pay cash for last year's $2,400 shortage. This way, your monthly payment will increase by only $200.

• You can ask the loan servicer to spread last year's $2,400 shortage over 24 months. Your escrow payment will increase by $300.

Granted, all these solutions for escrow shortage are painful, but it is best to call the loan servicer who can walk you through your options.

Increases in Homeowner's Insurance Premiums

An acquaintance recently told me that his mortgage payment had gone up $400. He has a fixed-rate loan, so the increase had nothing to do with any loan-rate adjustment. I asked him if his homeowner's insurance premium had increased, and he said he had discarded the mail from his insurance company because "the bank handles that."

Actually, his loan servicer, which happens to be his local bank, simply collects the escrow money and pays the homeowner's insurance bill no matter how much it increases.

In many states, homeowner's insurance premiums can increase by huge amounts in just one year. Depending on the timing of the insurance premium payment and the loan servicer's annual escrow calculation, the loan servicer may not realize the insurance premium increased by so much, and may not adjust the payment until the next analysis.

This causes another "double whammy" payment increase.

Steps to Reduce Risk of Escrow Payment Shock

• Before you buy a house, contact the county property appraiser and tax collector and come up with your own estimate of how much the property taxes will be after taxes are fully assessed.

Also contact an insurance agent and get an estimate of how much your homeowner's insurance premium will be.

Add these together, divide by 12, and add that to your projected loan principal and interest payment. (Assuming you have learned one of the painful lessons of the mortgage crisis and are getting a fixed-rate mortgage, you can use the BankingMyWay Fixed Mortgage Loan Calculator to calculate the loan payment.)

Can you afford the combined principal, interest and escrow payment? Depending on whether you live in Hurricane Alley, can you afford it if your homeowner's insurance premium rises 50%?

• Find out how to contact your loan servicer.

Call your loan servicer and ask when your annual escrow analysis takes place. Depending on the time of year you take your mortgage loan, consider changing the annual escrow analysis date, so that your payments can reflect insurance premium and tax increase more quickly.

• If you know your property taxes are going to increase the year after your purchase or construction, make sure you save up the money you will need to make up the shortfall.

Remember, the lender or loan servicer probably won't be collecting enough monthly escrow during the first year of the loan.

• Even though the loan servicer will pay future premium bills, stay in contact with your insurance agent.

Know when your annual homeowner's insurance policy expires and find out how much the renewal premium will be. If the increase is too much, ask your agent to shop for a lower-priced policy, or visit some other agents yourself.

You can check insurance company ratings using TheStreet.com's Insurance Ratings Screener.