If your monthly mortgage payment includes property taxes and homeowners insurance, you probably have a mortgage escrow account. An escrow account is a holding account your lender uses to collect and pay these bills on your behalf. Understanding how a mortgage escrow account works helps you budget and avoid surprises when your payment changes.
The short answer: an escrow account collects part of your property taxes and insurance each month, then pays those bills when they are due. Your payment can change each year when taxes or insurance premiums change. See our mortgage payment breakdown for how escrow fits into your total payment.
What is a mortgage escrow account?
An escrow account is a fund your lender manages to pay your property taxes and homeowners insurance (and sometimes other items like mortgage insurance). Each month, a portion of your mortgage payment goes into the escrow account. When a tax or insurance bill is due, the lender pays it from that account.
Escrow spreads large annual or semiannual bills across the year, so you do not have to come up with the full amount all at once. Not every loan requires an escrow account; some borrowers pay taxes and insurance directly, depending on the loan and the lender.
How escrow works
- At closing, you may fund the escrow account with a few months of reserves.
- Each month, part of your mortgage payment is added to the escrow account.
- When your property taxes or insurance premium is due, the lender pays it from escrow.
- Each year, the lender reviews the account and adjusts your payment if needed.
The lender does not keep the escrow money as profit. It is held and used only to pay your tax and insurance bills.
What escrow typically pays
A mortgage escrow account usually pays:
- Property taxes charged by your local government
- Homeowners insurance premiums
- Mortgage insurance, if required by your loan
- Sometimes flood insurance or other required coverage, if applicable
Your escrow account does not pay your principal and interest — that part of your payment goes directly to your loan.
Escrow analysis
Each year, your lender performs an escrow analysis. The analysis reviews:
- What was collected over the past year
- What was paid out for taxes and insurance
- What is expected for the coming year
If your taxes or insurance increased, the lender may need to collect more. If they decreased, the lender may collect less. The analysis tells you whether your payment will change and by how much.
Shortages and surpluses
After the escrow analysis, you may have a shortage or a surplus.
- Shortage: the account did not collect enough to cover the bills. The lender may increase your monthly payment to cover the shortage, or let you pay the shortage at once.
- Surplus: the account collected more than needed. If the surplus is over a certain amount, the lender may refund it or apply it to your account.
Ask your lender how shortages and surpluses are handled for your loan.
Why your payment can change
Even with a fixed-rate loan, your total monthly payment can change if your escrow costs change:
- Your property taxes rise after a reassessment
- Your homeowners insurance premium changes at renewal
- Your mortgage insurance is cancelled or changes
- A shortage from the previous year is spread across the new year
This is why a "fixed" mortgage payment can still go up or down over time — the principal and interest stay the same, but the escrow portion can change.
How to prepare for escrow changes
- Open your escrow analysis each year and read it.
- Ask your lender to explain any increase you do not understand.
- Keep a cushion in your budget for tax or insurance increases.
- Shop for homeowners insurance at renewal to compare costs.
- Review your property tax bill and appeal if you believe the assessment is wrong (where allowed).
Frequently asked questions
Do I have to use an escrow account? Many loans require an escrow account, but some let you pay taxes and insurance directly. Ask your lender about your options.
Can my payment go up with a fixed rate? Yes. Even with a fixed interest rate, your taxes and insurance can change, which can change the escrow portion of your payment.
What is an escrow analysis? An annual review of your escrow account that checks whether the amount collected covers your tax and insurance bills and adjusts your payment if needed.
What happens if my escrow is short? The lender may increase your monthly payment to cover the shortage, or let you pay the shortage at once. Ask your lender how shortages are handled.
Ready to estimate your full payment?
Use our mortgage calculator to estimate your principal and interest, then get a free quote for a full picture.
You can also call Alex Al-Ammar at (313) 992-9898 or email Alex@vestalending.com.
This article is for general information only. It is not legal, tax or financial advice. Escrow rules and requirements vary by loan and lender. Speak with a qualified professional about your individual situation.
