What Escrow Means in Your Mortgage Payment
Escrow is the part of your monthly mortgage payment that goes into a holding account for taxes and insurance
When you have a mortgage, your lender often requires you to pay property taxes and homeowners insurance through your mortgage payment rather than paying those bills directly. The lender collects this money each month in an escrow account — a separate account held by the lender or a third party — and then pays those bills on your behalf when they come due. This is not optional if you put down less than 20 percent on your home or if your loan agreement requires it.
Your monthly mortgage payment is split into four parts, often called PITI: principal (what you owe on the house), interest (the cost of borrowing), taxes (property tax), and insurance (homeowners insurance). The taxes and insurance portions go into escrow. You do not write separate checks to the county or your insurance company — the lender handles that from the escrow account.
The lender estimates how much you will owe in taxes and insurance over the year, divides that by 12, and adds that amount to your monthly payment. Once a year, usually in the spring, the lender reviews the actual bills and adjusts your monthly escrow payment up or down if the estimate was wrong. This adjustment is called an escrow analysis.
Key Takeaways
- Escrow is money held by your lender to pay property taxes and homeowners insurance on your behalf, collected as part of your monthly mortgage payment.
- Your lender estimates annual taxes and insurance, divides by 12, and adds that amount to your payment each month.
- Once a year your lender reviews actual bills and may raise or lower your monthly escrow payment based on what you actually owe.
- If you paid down your loan to less than 80 percent of the home's value, you may be able to request that escrow be removed, though the lender can refuse.
How the escrow account fills and empties
Think of escrow as a holding tank that fills every month and empties twice a year. In January, your lender collects the escrow portion of your payment. That money sits in the account. In spring, when property taxes are due, the lender pays the county from the escrow account. In fall or early winter, when your homeowners insurance premium is due, the lender pays the insurance company from the same account.
The lender does not earn interest on the money in your escrow account, and in most states, neither do you. The money is simply held until the bills come due. If the account runs low before a bill is due, the lender may require you to make an additional payment to bring the balance up. If the account has extra money left over after all bills are paid, the lender either refunds it to you or credits it toward next year's escrow payments.
The timing matters because property tax bills and insurance premiums vary by location and by year. If your county raises property taxes or your insurance company raises your premium, your escrow payment will go up at the next analysis. If taxes or insurance go down, your payment goes down.
When your escrow payment changes
Your lender is required to conduct an escrow analysis at least once per year. Most do this in spring, around the time property taxes are due. The lender looks at what you actually paid in taxes and insurance over the past year, compares it to what you paid in escrow, and adjusts your monthly payment for the coming year.
If you owed more than you paid in escrow, your monthly payment goes up. If you paid more than you owed, your payment goes down or you receive a refund. The lender must notify you of any change at least 10 days before the new payment amount takes effect. The notice will show the old payment, the new payment, and the reason for the change.
Large increases sometimes happen when property taxes rise sharply or when you refinance your mortgage. Refinancing resets the escrow account, and if the new loan amount is higher, the escrow payment can jump significantly. This is one reason to ask your lender for an escrow estimate before you refinance.
Removing escrow from your mortgage
If your loan balance has dropped to 80 percent or less of your home's current value, you may be able to request that your lender remove the escrow requirement. This means you would pay property taxes and homeowners insurance directly to the county and insurance company instead of through your mortgage payment. Your monthly mortgage payment would drop by the escrow amount.
The lender is not required to agree to remove escrow, even if you meet the 80 percent threshold. Some lenders will do it; others refuse. If your lender agrees, you become responsible for making sure those bills are paid on time. If you miss a property tax payment, the county can place a lien on your home. If you let homeowners insurance lapse, your lender can buy insurance on your behalf and add the cost to your loan balance.
To request escrow removal, contact your lender's loan servicing department. You will need to provide proof of your home's current value, usually an appraisal or a recent property tax assessment. The process takes several weeks, and the lender may charge a fee.
What happens if escrow runs short
If your property taxes or insurance premiums rise unexpectedly, the escrow account may not have enough money to cover the bills when they come due. When this happens, the lender covers the shortfall and then requires you to repay it. You have two options: pay the shortage in a lump sum, or have the lender spread it over the next 12 months by raising your monthly escrow payment.
Most borrowers choose to spread the shortage over 12 months because a lump sum can be hundreds of dollars. The lender will notify you of the shortage and your options. If you do nothing, the lender will usually add it to your monthly payment automatically.
To avoid large shortages, review your escrow analysis notice each year. If you see a big increase coming, you can contact your lender to discuss options. Some lenders will let you make an extra payment to the escrow account to cushion against future increases.
Escrow and property tax appeals
If you believe your property tax assessment is too high, you can file an appeal with your county assessor. If your appeal succeeds and your taxes are lowered, the lender will eventually adjust your escrow payment down. However, the process takes time — sometimes six months or longer — and you will not see the payment reduction until the next escrow analysis.
When you file a tax appeal, notify your lender in writing so they know to expect a lower bill. Keep copies of all correspondence with the assessor. When the appeal is approved, send a copy of the approval letter to your lender's loan servicing department. This helps ensure the new tax amount is reflected in your next escrow analysis.
Escrow and refinancing
When you refinance your mortgage, the old escrow account is closed and a new one is opened. The lender calculates a new escrow payment based on the new loan amount and the current property taxes and insurance rates. If your new loan is larger than your old one, your escrow payment will likely increase.
Before you refinance, ask your lender for an escrow estimate. This shows what your new monthly payment will be, including the escrow portion. Compare this to your current payment so you understand the full cost of refinancing. Some borrowers refinance to a lower interest rate but end up with a higher total payment because the escrow portion increased.
Frequently Asked Questions
Can I pay my property taxes and insurance myself instead of through escrow?
Only if your loan balance is 80 percent or less of your home's value and your lender agrees to remove the escrow requirement. If escrow is required by your loan agreement, you cannot opt out. Even if you remove escrow, your lender can reinstate it if you miss a property tax or insurance payment.
What if my escrow payment goes up a lot after the analysis?
Large increases usually mean property taxes or insurance premiums rose. Ask your lender for a detailed breakdown of what changed. If you disagree with the escrow estimate, you can request a review, though the lender is not required to change it. You can also shop for cheaper homeowners insurance to lower that portion of the payment.
Do I earn interest on money in my escrow account?
In most states, no. The lender holds the money without paying interest. A few states require lenders to pay interest on escrow accounts, but the rate is typically very low. Check your loan documents or contact your lender to see if your state requires interest.
What happens to my escrow account if I pay off my mortgage early?
When you pay off the loan, the lender closes the escrow account and refunds any remaining balance to you. The refund usually arrives within 30 to 45 days. Make sure your address is current with the lender so the check reaches you.
Can the lender use my escrow money for something other than taxes and insurance?
No. Federal law prohibits lenders from using escrow funds for any purpose other than paying property taxes, homeowners insurance, and in some cases, mortgage insurance or HOA fees. The lender must keep escrow money separate from their own operating accounts.