If you have a mortgage, you almost certainly have an escrow account — but many homeowners do not fully understand how it works or why their monthly payment changes from year to year. An escrow account is a holding account managed by your mortgage servicer that collects and pays your property taxes and homeowners insurance on your behalf.
Understanding your mortgage escrow account helps you anticipate payment changes, avoid escrow shortages, and make informed decisions about whether to waive escrow if your lender allows it. This guide covers everything you need to know.
Key Takeaways
- An escrow account collects a portion of your monthly payment to cover property taxes and insurance.
- Your servicer reviews the account annually and adjusts your payment if taxes or insurance change.
- An escrow shortage occurs when the account does not have enough to cover upcoming bills.
- An escrow surplus of more than $50 must be refunded to you within 30 days.
- Some lenders allow you to waive escrow if you have 20%+ equity, often for a small fee.
What Is a Mortgage Escrow Account?
A mortgage escrow account is a separate account held by your loan servicer. Each month, a portion of your mortgage payment is deposited into this account. When your property tax bill and homeowners insurance premium come due, your servicer pays them directly from the escrow account. This ensures these critical bills are always paid on time, protecting both you and the lender.
Most lenders require escrow accounts for borrowers with less than 20% equity. Even if you have 20% equity, many lenders still require escrow — and some charge a fee to waive it.
What Does Escrow Cover?
- Property taxes: Collected and paid to your local government, typically twice a year.
- Homeowners insurance: Paid annually to your insurance company.
- Flood insurance: Required if your home is in a designated flood zone.
- Private mortgage insurance (PMI): Sometimes collected through escrow if required.
How Your Escrow Payment Is Calculated
Your servicer estimates the total annual cost of your property taxes and insurance, then divides by 12 to determine your monthly escrow contribution. Federal law (RESPA) allows servicers to maintain a cushion of up to two months of escrow payments as a buffer against unexpected increases.
| Item | Annual Cost | Monthly Escrow Contribution |
|---|---|---|
| Property taxes | $4,800 | $400 |
| Homeowners insurance | $1,800 | $150 |
| Flood insurance | $600 | $50 |
| Total escrow | $7,200 | $600/month |
Annual Escrow Analysis: Why Your Payment Changes
Every year, your servicer performs an escrow analysis — a review of the account to ensure it has enough to cover upcoming bills. If your property taxes or insurance premiums have increased, your monthly escrow contribution will go up. If they have decreased, your payment may go down. This is the most common reason mortgage payments change from year to year, even on fixed-rate loans.
Escrow Shortage vs. Escrow Surplus
An escrow shortage occurs when the account balance falls below the required minimum — usually because taxes or insurance increased more than anticipated. Your servicer will notify you and give you the option to pay the shortage in a lump sum or spread it over 12 months added to your regular payment.
An escrow surplus occurs when the account has more than the required cushion. Under federal law, if the surplus exceeds $50, your servicer must refund it to you within 30 days of the annual analysis.
“Many homeowners are surprised when their mortgage payment increases. It is almost always the escrow portion — taxes and insurance went up. Understanding this prevents unnecessary alarm and helps you plan ahead.” — Mortgage Servicer Customer Service Manager
Can You Waive Escrow?
Some lenders allow borrowers with sufficient equity — typically 20% or more — to waive the escrow requirement and pay property taxes and insurance directly. This gives you more control over your cash flow and allows you to earn interest on the funds until they are due. However, many lenders charge an escrow waiver fee (typically 0.25% of the loan amount), and you must be disciplined about setting aside funds for these large annual bills.
FAQ
Why did my mortgage payment increase if I have a fixed-rate loan?
On a fixed-rate mortgage, your principal and interest payment never changes. However, the escrow portion of your payment — which covers property taxes and homeowners insurance — can change each year based on your annual escrow analysis. If your property taxes or insurance premiums increased, your servicer will raise your monthly escrow contribution accordingly, resulting in a higher total payment.
What happens if my escrow account runs short?
If your escrow account has a shortage, your servicer will notify you after the annual analysis. You typically have two options: pay the shortage in a lump sum, or have it spread over the next 12 months as an addition to your regular monthly payment. Paying the lump sum avoids a payment increase, while spreading it out is easier on your cash flow.
Can I remove escrow from my mortgage?
Some lenders allow escrow waiver for borrowers with at least 20% equity and a good payment history. You typically need to submit a written request and may be charged a waiver fee. If approved, you become responsible for paying property taxes and homeowners insurance directly and on time. Missing these payments can trigger a default, so only waive escrow if you are confident in your ability to manage these obligations independently.
How much does my lender keep in my escrow account?
Federal law (RESPA) limits the escrow cushion your servicer can maintain to two months of escrow payments. This buffer protects against unexpected increases in taxes or insurance. If your account balance exceeds the required amount by more than $50, your servicer must refund the surplus to you within 30 days of the annual escrow analysis.