What Is an Escrow Account? How Mortgage Escrow Works
An escrow account is a holding account managed by your mortgage servicer that collects a portion of your monthly payment to cover property taxes and homeowner's insurance when they come due. Here's how it works and what to watch for.
What an Escrow Account Collects
Each month, your mortgage payment includes a portion for principal and interest (P&I) plus an escrow contribution. The escrow portion covers: annual property taxes (divided by 12 and collected monthly), homeowner's insurance premium (annual premium ÷ 12), and — if required — flood insurance or mortgage insurance premiums.
When your tax bill or insurance renewal comes due, your servicer pays it directly from the escrow account. You never write a separate check for these items.
Why Lenders Require Escrow
Lenders require escrow to protect their collateral. If property taxes go unpaid, the county can place a tax lien that takes priority over the mortgage — potentially allowing the government to seize the property. Unpaid homeowner's insurance would leave the lender's collateral unprotected in the event of fire or disaster.
Conventional loans with 20%+ down payment sometimes allow borrowers to opt out of escrow — this is called 'waiving escrow.' Most FHA and VA loans require escrow regardless of down payment.
Escrow Shortages and Surpluses
Your servicer performs an annual escrow analysis each year. If property taxes or insurance increased, your account may have a shortage — meaning there isn't enough to cover the coming year. You'll receive a notice offering two options: pay the shortage in a lump sum, or have it spread across 12 months by increasing your monthly payment.
If taxes or insurance decreased, you may have a surplus. Surpluses above a threshold are typically refunded to you, and your monthly payment may decrease.
How Your Escrow Payment Is Calculated
At loan setup, your lender estimates the annual property tax and insurance cost and divides by 12. They also collect a 2-month cushion (required by RESPA) to ensure the account never goes negative. This is why your cash-to-close includes prepaid escrow items.
Example: $400,000 home with 1.2% annual property tax = $4,800/year = $400/month. Homeowner's insurance of $1,800/year = $150/month. Total escrow contribution: $550/month added to your P&I payment.
Common Questions
Can I remove escrow from my mortgage?
Possibly. On conventional loans, once you have 20%+ equity, you may be able to waive escrow by contacting your servicer. There is sometimes a small fee. FHA and VA loans generally require escrow for the life of the loan. Check your loan documents or call your servicer.
Why did my mortgage payment go up?
The most common reason is an escrow shortage due to rising property taxes or insurance premiums. Your servicer is required to send you an escrow analysis statement explaining the change. Review it to understand which component increased.
What happens to my escrow account if I sell my house?
When you sell, your mortgage is paid off at closing. Any remaining balance in your escrow account is refunded to you — typically within 30 days of payoff. The refund appears as a check from your servicer.
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