An escrow account lets your servicer pay property taxes and homeowners insurance from part of your monthly payment. Here is how it is set up, what your lender can require, and why the amount changes.
If your total monthly mortgage payment is bigger than the loan payment you were quoted, escrow is usually the reason. An escrow account collects part of each payment so your property taxes and homeowners insurance get paid on time, without one or two large checks a year. Here is how these accounts work and why your payment can change.
What an Escrow Account Is and What It Pays For
An escrow account, sometimes called an impound account depending on where you live, is set up by your mortgage lender to pay certain property-related expenses. A portion of each monthly payment goes into the account, and your servicer pays the tax and insurance bills when they come due.
For most borrowers, the total monthly payment is principal, plus interest, plus mortgage insurance if it applies, plus escrow for taxes and insurance. Principal and interest generally stay the same on a fixed-rate loan. Escrow does not, because tax bills and insurance premiums change, and if your home’s value rises, your property taxes typically rise with it.
When comparing loan offers, look at the total monthly payment, not just principal and interest. The Loan Estimate shows it in the “Projected Payments” section on page 1. Our guide to the Loan Estimate and Closing Disclosure shows where these figures appear.
When a Lender Can Require Escrow (and When It’s Optional)
Many lenders require you to pay taxes and insurance through escrow so they can be sure the bills get paid, and sometimes escrow is required by law:
- A loan considered “higher-priced” under the Truth in Lending Act may require escrow for at least the first five years.
- Some loan types require escrow for the entire term.
Even when escrow is optional, you can request one voluntarily to spread large bills across twelve smaller payments.
How Your Initial Escrow Deposit Is Figured at Closing
Before closing, the lender estimates the total annual expenses the account will need to pay. If your loan is a federally related mortgage loan under RESPA, the amounts you can be required to pay are limited:
- At closing, as part of your cash to close, the lender can collect only enough to avoid a negative balance, plus up to two months’ worth of estimated disbursements as a cushion.
- Each month, the servicer can require up to one-twelfth of the total annual escrow payments it reasonably anticipates paying out.
Say your property taxes are $4,800 a year and your homeowners insurance $1,200, for $6,000 total. The monthly escrow portion would be $500, and the cushion at closing could be as much as $1,000. For most mortgages with escrow, the servicer must also provide an initial escrow account statement showing how the numbers were calculated.
Why Your Payment Changes: Annual Escrow Analyses and Shortages
Your servicer must run an escrow analysis and send an annual escrow account statement within 30 calendar days of the end of the escrow account computation year. The statement shows the account history and a projection of the next year, so check it whenever your payment changes.
Changes usually trace back to the bills: a higher tax bill or insurance premium raises the one-twelfth figure. If bills rise faster than the account collected, the account can end up short. That negative balance is a deficiency, and if the servicer advances money to cover your bills, it must run an escrow analysis before seeking repayment.
Worth knowing
Compare the projected disbursements on your annual escrow statement with your actual tax and insurance bills each year.
Warning signs include an unannounced payment change, force-placed insurance on your statement, or a notice that your property taxes have not been paid.
Escrow Waivers, Unescrowed Loans and What to Watch For
If your loan has no escrow account, the bills are yours to plan for. Set aside the tax and insurance amounts each month. If property taxes go unpaid, your state or local government may impose fines and penalties or place a tax lien on your home, and you could face foreclosure. If you fall behind, your lender may add the amounts to your loan balance, add an escrow account, or purchase force-placed insurance and bill you for it. Force-placed insurance is typically more expensive than a policy you buy yourself.
Your Rights: Statements, Notices and Help From the CFPB
If something looks wrong, contact your servicer right away. You may need to send an information request or a notice of error, a written letter disputing the error. If the servicer failed to pay your property taxes, send a copy of the bill with your notice of error and contact your tax authority, since an unpaid tax can lead to a lien.
The Consumer Financial Protection Bureau offers more help. Use its “Find a Counselor” tool to locate HUD-approved housing counseling agencies, call the HOPE Hotline at (888) 995-HOPE (4673), or submit a complaint online or by calling (855) 411-CFPB (2372). If you are facing imminent foreclosure or have been served with legal papers, the CFPB suggests consulting an attorney or a housing counselor.
Escrow is one moving part inside your total payment. To see how it fits with the rest, read what’s inside a monthly mortgage payment, and if your payment includes mortgage insurance, our guide to down payments and when PMI ends explains that piece as well.
The short version
- An escrow account holds a portion of your monthly payment so your servicer can pay property taxes and homeowners insurance when they are due.
- For a federally related mortgage loan under RESPA, the cushion at closing is limited to two months of estimated disbursements, and the monthly escrow amount is capped at one-twelfth of anticipated annual costs.
- Servicers must run an annual escrow analysis and send an annual escrow account statement within 30 days of the end of the computation year.
- If you pay taxes and insurance yourself, unpaid taxes can bring fines, penalties, a tax lien or foreclosure, and your lender may buy force-placed insurance, which is typically more expensive.
- If something looks wrong with your escrow account, contact your servicer, send a notice of error if needed, and get help from the CFPB.
Readers also ask
Do all mortgages require an escrow account?
No, but many lenders require it so taxes and insurance get paid. Loans considered higher-priced under the Truth in Lending Act generally require escrow for at least the first five years, and some loan types require it for the entire term.
Why did my monthly payment go up even though my rate is fixed?
On a fixed-rate loan, principal and interest stay the same, but the escrow portion changes when property taxes or insurance premiums change. Your servicer adjusts the payment after its annual escrow analysis.
What happens if there is a shortage in my escrow account?
The servicer must perform an escrow account analysis before seeking repayment of any deficiency, which is a negative balance. Your annual escrow statement shows the account history and a projection of the coming year so you can see where the numbers come from.
Can I pay property taxes and insurance myself instead?
Some loans allow it, but you have to budget for large bills once or twice a year. If taxes go unpaid, your state or local government may impose fines and penalties or place a tax lien on your home, and your lender may add an escrow account or buy force-placed insurance for you.
This guide is general information about U.S. mortgages, not financial, tax or legal advice. Loan terms depend on the lender and on your credit, income and property, so confirm the details with your lender, and see consumerfinance.gov for official guidance.
