In this guide
An escrow account is a holding account your mortgage servicer uses to collect part of your monthly payment and then pay your homeowners insurance premium and property taxes for you when they come due. It spreads big annual bills across the year. Because premiums and taxes change, your escrow payment, and so your total monthly mortgage payment, can change too, even if your loan has a fixed rate.
Key takeaways
- Escrow collects a share of insurance and tax costs each month and pays the bills for you.
- Some lenders require escrow, some states require it by law, and some borrowers can opt out under certain conditions.
- Servicers run an escrow analysis at least once a year, which can raise or lower your payment.
- If your insurance premium goes up, expect an adjustment. A shortage may be spread out or repaid.
- If you shop for a new policy, tell your servicer so it pays the right company. A lapse can trigger expensive force-placed insurance.
How escrow works
The Consumer Financial Protection Bureau (CFPB) describes it this way: your lender or servicer sets up an escrow account, sometimes called an impound account, to pay property-related costs like taxes and insurance. A portion of each monthly mortgage payment goes into it, so you don't face one large bill each year. The servicer manages the account and pays the bills when they're due.
Your monthly payment is often described as PITI, which stands for:
- Principal and Interest, which pay down the loan
- Taxes, meaning property taxes
- Insurance, meaning homeowners insurance (and mortgage insurance or flood insurance if you have them)
Only the taxes and insurance parts go into escrow. The principal and interest part stays the same on a fixed-rate loan.
A simple example
These numbers are only to illustrate the idea. If your annual homeowners premium is $1,800 and property taxes are $3,600, your servicer needs $5,400 a year, which is $450 a month. You pay $450 each month into escrow on top of principal and interest. When the insurance bill comes due, the servicer pays it from the account. If the premium rises to $2,400 the next year, the monthly escrow amount needs to rise as well.
Is escrow required?
The CFPB notes that some lenders require escrow and some states require it by law. Whether it's required often depends on the loan type and the down payment size. Some borrowers with certain conventional loans can ask to waive escrow, though lenders may charge a fee or require a higher rate, and not every lender allows it. If you don't have escrow, you pay the insurance and tax bills yourself, directly.
| With escrow | Without escrow | |
|---|---|---|
| Who pays the insurance premium? | Your servicer, from the escrow account | You, directly to the insurer |
| Payment pattern | Spread across 12 monthly payments | Lump sum or the insurer's own payment plan |
| Risk of missing a bill | Lower, but you still need to check that bills are right | Higher if you forget or budget poorly |
| Control over cash | Less flexible. Money sits in the account | More flexible |
The annual escrow analysis
Servicers review the account at least once a year and send you an annual escrow account statement. It compares what was paid in and out, and projects the coming year. Then your payment is reset. Under federal rules in Regulation X, a servicer can generally keep a cushion of up to about two months of escrow payments, or one-sixth of the estimated annual disbursements, unless state law or your mortgage allows less.
Three things can come out of the analysis:
- Balanced: the account is on track, with the allowed cushion.
- Shortage: the account is projected to be below what's needed, often because a premium or tax bill rose.
- Surplus: the account has more than needed. Larger surpluses are generally to be refunded or credited under the rules.
If there's a shortage
CFPB servicing guidance outlines options depending on the size of the shortage. For a shortage less than one month's escrow payment, the servicer may do nothing, ask you to repay within 30 days, or spread it over at least 12 months. For a shortage of one month's payment or more, it may do nothing or spread it over at least 12 months. Your own statement explains what applies, and you can ask the servicer questions or ask for the figures behind it. Rules can change, so check the current CFPB resources.
Why your escrow payment goes up
- Your homeowners insurance premium rose at renewal. See why home insurance is going up.
- Property tax assessments or tax rates increased.
- Last year's account had a shortage that is being repaid.
- You added coverage, such as flood insurance, or changed your coverage limits.
Because insurance costs are part of this, reviewing your policy matters. Changing deductibles or coverage can affect the premium and so the escrow payment, as explained in how to lower your home insurance premium. Don't cut necessary coverage only to reduce the payment, though.
How insurance gets paid through escrow
- Your insurer sends a renewal bill or notice, often to the servicer as well as to you.
- The servicer pays the premium from escrow by the due date.
- You receive the policy documents. Check that the premium paid matches your renewal notice.
- If you change insurers, send the new insurer's details, policy number and payment instructions to the servicer promptly, and ask for the old insurer to be removed.
Watch out: Escrow doesn't mean you can forget about your policy. If a policy lapses or is canceled, the lender may buy coverage for you and bill you. The CFPB says this is typically more expensive than insurance you buy on your own, and it may protect the lender more than you.
Claims and escrow
When you have a covered loss, the claim payment for the structure often names your mortgage lender as well as you. Triple-I notes that the lender may hold the funds in escrow and release them as work is completed, sometimes after inspecting the finished job. This is separate from the monthly escrow account for taxes and insurance, but you may hear the word used for both. Our guide to how to file a home insurance claim covers the steps. Additional living expense payments should be payable to you alone, per Triple-I.
Checking your escrow
- Read the annual escrow statement and compare the insurance and tax amounts to your own bills.
- Confirm the insurer, policy number and mailing details the servicer has are current.
- Ask the servicer how a shortage will be handled, and in writing if needed.
- Keep your own record of renewals so you can spot mistakes.
- If you disagree with an escrow calculation, you can send a written request to the servicer, and you may contact the CFPB or your state regulator if you don't get a response.
If you're a new buyer, see home insurance for first-time buyers for how escrow fits into closing and your first year.
Frequently asked questions
Can I change my homeowners insurance company if I have escrow?
Generally yes. Tell your servicer about the new policy so it pays the right insurer, and make sure the old policy isn't canceled before the new one starts.
Why did my mortgage payment go up if I have a fixed rate?
A fixed rate fixes principal and interest. The escrow part can change when taxes or insurance premiums change, or when a shortage is repaid.
What is a force-placed insurance policy?
It's coverage a lender buys when it believes your insurance has lapsed. The CFPB says it's typically more expensive than a policy you buy yourself.
Can I cancel escrow?
Sometimes. It depends on your lender, loan type and state. Ask your servicer what conditions and fees apply.
Does the escrow cushion belong to me?
The money in the account is held for your taxes and insurance, and surplus amounts are generally returned or credited as the rules provide. Your servicer's statement shows balances, and you can ask for details.
Sources
- CFPB – What is an escrow or impound account?
- CFPB – Regulation X, 12 CFR 1024.17 Escrow accounts
- CFPB – Mortgage Servicing FAQs
- CFPB – Is there a limit on how much my mortgage lender can make me pay into escrow?
- Insurance Information Institute – Understanding the insurance claims payment process
General information only. This guide explains general concepts and is not insurance, legal or financial advice. Rules and prices vary by state and insurer. Check your policy documents and speak to a licensed insurance professional or your state insurance department about your situation.