Planning for Escrow Changes When Building a New Home

Building a new home is an exciting milestone, but it comes with financial nuances that can catch even the most prepared homeowners off guard. One of the most common surprises is an unexpected increase in your mortgage payment due to changes in escrow for property taxes. Understanding why this happens and how to prepare can save you from financial stress and unexpected budgeting challenges.

When you build a new home, the property taxes for the first year are often based solely on the value of the land, not the completed home. This is because tax assessments typically lag behind construction timelines. During this period:

Initial Tax Assessment: At closing, your lender may calculate your escrow payments based on the land's current assessed value.

Updated Tax Assessment: After your home is built, the county tax assessor updates the property’s valuation to include the home and the land. This updated valuation significantly increases the property taxes owed.

Impact on Escrow: Your lender will notice the shortfall when they pay the updated tax bill. To cover the difference and ensure future payments are accurate, they’ll adjust your escrow account, often resulting in higher monthly mortgage payments.

The jump in escrow payments can be significant. Homeowners have reported significant increases when the new tax assessments are applied. This can cause financial strain if you haven’t budgeted for it.

For example:

Before Assessment: Your lender calculates taxes based on land valued at $50,000, resulting in an escrow portion of $200/month.

After Assessment: Your property is reassessed to $300,000 (land + home), increasing the tax bill to $6,000/year or $500/month.

When buying new construction, ask your lender, builder, or real estate agent about local property tax timelines. Knowing when the reassessment will happen gives you a heads-up.

Ask for Estimates: Use the total value of the home and land to estimate taxes, not just the land value. This will give you a clearer picture of what to expect.

Research Local Tax Rates: Property tax rates vary widely by location. Check with your local tax assessor’s office for details.

To avoid being blindsided by a sudden increase, set aside extra money each month in a savings account. Treat this as a self-managed escrow cushion.

For example: If your current escrow payment is $200/month but you estimate the reassessed amount will be $500/month, save the difference ($300/month) to prepare for the adjustment.

Review your mortgage statements regularly to track your escrow balance and any changes in projected taxes. Many lenders provide an annual escrow analysis, but you don’t have to wait for it to plan ahead.

If you’re facing a significant payment increase, reach out to your lender immediately. They may offer options such as:

If you believe your home’s valuation is too high, you may be able to appeal the tax assessment. Check with your local tax assessor’s office for the appeal process and deadlines.

Here’s what other homeowners have learned from experiencing unexpected escrow changes:

Be Proactive: Don’t assume your initial payments reflect the long-term costs of owning a new home.

Expect Delays: Tax assessments can take a year or longer to update after construction is completed.

Communicate: Keep open lines of communication with your lender and local tax office to stay ahead of potential changes.

Planning for escrow changes is a vital part of budgeting for new home construction. By understanding how property taxes are calculated, building an escrow cushion, and staying proactive, you can avoid the financial shock of a sudden mortgage payment increase.