Escrow Accounts Explained: What Is in Your Monthly Mortgage Payment

An escrow account is the part of your mortgage payment that quietly pays your property taxes and homeowners insurance for you. Once you understand how it is funded and reviewed, a changing payment on a fixed-rate loan becomes something you can check yourself.

Key takeaways

• Your monthly payment usually has four parts, often called PITI: principal, interest, taxes and insurance. Only the first two are fixed on a fixed-rate loan.
• The servicer collects one-twelfth of your yearly tax and insurance bills each month, plus a cushion. Federal rules cap that cushion at about two months of escrow payments.
• Once a year the servicer reviews the account. A shortage raises your payment, and a surplus lowers it or comes back to you.
• Escrow waivers are sometimes available on conventional loans with enough equity, often for a fee, and generally not on FHA loans.
• Escrow figures on a Loan Estimate reflect the property and closing date, not the lender, so they are a poor way to rank offers.

What is an escrow account on a mortgage?

An escrow account is a holding account your mortgage servicer keeps in your name. Each month, part of your payment goes into it. When your property tax bill or homeowners insurance premium comes due, the servicer pays it from that account. In some states, the same thing is called an impound account.

Spreading large, infrequent bills across twelve deposits makes them easier to plan for and protects the lender's interest in the home. An unpaid tax bill can lead to a lien, and a lapsed policy leaves the house unprotected.

The four parts of PITI

PITI stands for principal, interest, taxes and insurance. Principal reduces your balance and interest is the cost of borrowing that month. Taxes and insurance, including mortgage insurance where it applies, are the escrow items.

On a fixed-rate loan, the principal and interest portion is set at closing and does not change. The taxes and insurance portion is an estimate, reviewed every year. That distinction explains most payment surprises.

How does the servicer collect and pay taxes and insurance?

The servicer estimates your yearly tax and insurance bills, collects one-twelfth each month with your payment, and pays each bill when it is due. The servicer may be a different company from your original lender.

The monthly deposit

The estimated yearly total is divided by twelve and added to your principal and interest payment. Under federal rules, the servicer must pay each bill on time as long as your loan is current.

The cushion

Most servicers also hold a cushion, sometimes called a reserve, so the account does not run dry. Federal rules under the Real Estate Settlement Procedures Act cap the cushion at one-sixth of your estimated annual escrow disbursements. That works out to about two months of escrow payments. Your loan documents or state law can set a lower limit, but not a higher one.

The initial deposit at closing

The account needs money in it before the first bill arrives, so you fund it at closing. That deposit appears in Section G of your Loan Estimate, labeled "Initial Escrow Payment at Closing." How many months are collected depends on when your next bills fall relative to your closing date. Section F, just above it, lists prepaids, which is where the first year of homeowners insurance usually sits.

What is an annual escrow analysis?

At least once every twelve months, the servicer reviews the account. It compares what it collected against what it paid, projects the coming year's bills, and recalculates your monthly escrow payment. You receive an annual escrow account statement showing the math.

Escrow shortage explained

A shortage means the account holds less than the servicer projects it needs, usually because a tax bill or insurance premium rose. First, the servicer raises the monthly escrow payment to match the new, higher bills. Second, it recovers the shortage itself, typically by spreading it across at least the next twelve payments. Many servicers also let you pay the shortage as a lump sum. That removes the second increase but not the first, because the bills are still higher.

Escrow surplus

A surplus means the account holds more than it needs, often because a bill came in lower than projected. Under federal rules, a surplus above a small threshold is generally refunded within 30 days of the analysis, provided your loan is current. A smaller surplus may be credited against next year's payments instead.

Why did my mortgage payment go up on a fixed-rate loan?

The answer is almost always in the taxes and insurance portion, since fixed-rate principal and interest cannot change. The common causes are:

• A property tax reassessment. Many counties reassess after a sale, so a recently bought home can see a jump in the second year.
• A homeowners insurance premium increase at renewal.
• The end of a tax exemption or abatement that applied to the previous owner.
• A shortage from last year being repaid on top of the new, higher monthly amount.

The annual escrow statement shows which of these happened. If insurance is the culprit, shopping the policy at renewal is one lever you control. If taxes are the culprit, your county's appeal process is the place to look. Private mortgage insurance is a related case, since it is often collected through escrow and your payment drops when it is cancelled. We cover when that happens in private mortgage insurance explained.

Can you waive escrow on your mortgage?

Sometimes. Lenders may allow a waiver on conventional loans with enough equity, and generally not on FHA loans. A waiver means you pay taxes and insurance directly, and the servicer collects only principal and interest.

When lenders allow it

On conventional loans, lenders commonly allow a waiver when the loan-to-value ratio is at or below a threshold, often 80 percent. Some lenders charge a fee for the waiver or price the loan slightly higher without escrow. The lender confirms the threshold and any cost for your loan. For how that ratio is measured, see loan-to-value explained.

FHA loans generally require an escrow account for the life of the loan, and the monthly mortgage insurance premium is collected through it. Certain higher-priced loans must also keep escrow for a set number of years under federal rules.

The trade-offs

Waiving escrow keeps the cash in your own account until the bills are due. The trade-off is discipline. A missed tax bill or lapsed policy is your problem alone. If coverage lapses, a lender can force-place insurance, which usually costs more. Many borrowers who waive set aside the same monthly amount themselves.

How do you compare the escrow section across Loan Estimates?

Treat escrow lines as a property cost to plan for, not as a way to rank lenders. Lenders quoting the same home and closing date work from the same bills, so those figures should look similar.

Start on page 1. The Projected Payments table shows "Estimated Taxes, Insurance & Assessments" as a monthly figure, with a column that says whether each item is in escrow. If one lender's figure is far lower, the likely explanation is an optimistic estimate rather than a better deal.

On page 2, Sections F and G depend on the property and the closing date, not the lender. They also sit in the category with no tolerance limit. As long as the original estimate was made in good faith, they can change before closing without a revised estimate. For which charges are held to which limits, read which closing costs can change.

The rate, Section A origination charges, points and lender credits are what separate lenders, as how to read a Loan Estimate explains. Lenders can differ on whether they require escrow and what a waiver costs, so ask each one.

Frequently asked questions

What is an escrow account on a mortgage?

An escrow account is an account your mortgage servicer maintains to pay your property taxes and homeowners insurance. Part of each monthly payment is deposited into it, and the servicer pays the bills when they come due. It is the taxes and insurance part of PITI, and in some states it is called an impound account.

Why did my mortgage payment go up if I have a fixed rate?

On a fixed-rate loan, the principal and interest portion never changes, so an increase almost always comes from the escrow portion. Property taxes or insurance premiums rose, a shortage from last year is being repaid, or a previous owner's exemption ended.

What is an escrow shortage and how do I pay it back?

An escrow shortage happens when the account holds less than the servicer projects it needs, usually after a tax or insurance increase. The servicer raises your monthly escrow payment to match the new bills and typically spreads the shortage across twelve or more payments. Many servicers also allow a lump-sum payment, which removes the repayment portion but not the increase from higher bills.

Can I waive escrow on my mortgage?

Sometimes. Conventional lenders often allow an escrow waiver when the loan-to-value ratio is at or below a threshold, commonly 80 percent. Some charge a fee for it. FHA loans generally require escrow for the life of the loan. Certain higher-priced loans must keep escrow for a set number of years under federal rules. The lender confirms what applies to your loan.

What is an escrow cushion on a mortgage?

The cushion is an extra balance the servicer keeps in your escrow account as a buffer against bills that come in higher than estimated. Federal rules cap it at one-sixth of your projected annual escrow disbursements, which is about two months of escrow payments. Your loan documents or state law can set a lower cushion but not a higher one.

See the whole payment, not just the rate

Escrow is the part of a mortgage payment that keeps moving after closing. Knowing how it works lets you read each annual statement without guessing.

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Remember that this is general information, not financial advice, and every situation is different.

HomeTurf is a technology marketplace, not a lender or loan originator. This content is for general information only and is not financial or legal advice.