Costs & insurance

Escrow

An account your lender uses to collect and pay property taxes and insurance on your behalf, spreading those bills across your monthly payment.

Sources

What does escrow mean?

Rather than leaving you to save for a big annual tax or insurance bill, the lender collects one-twelfth of it inside each monthly payment and holds the money in an escrow account, then pays the bills when they come due. That is why your payment can change year to year even on a fixed-rate loan — taxes and premiums move. Lenders re-analyze the account annually and refund or collect any shortfall.

How an escrow account works

With escrow, your servicer collects one-twelfth of the yearly property tax and insurance bills with each payment and pays those bills when due. With $4,800 a year in taxes and $2,000 in insurance, escrow adds about $567 to your monthly payment.

Federal rules let the servicer hold a cushion of up to one-sixth of the yearly total — here about $1,133 — to cover increases.

The annual escrow analysis

Once a year the servicer compares what it collected with what it paid. If taxes or premiums rose, you will see a shortage — paid as a lump sum or spread over the next 12 months — and a higher payment going forward. A surplus of $50 or more is refunded.

Government-backed loans generally require escrow. Conventional lenders may let you waive it with enough equity, sometimes for a small fee; you then pay the tax and insurance bills yourself.

Frequently asked

Why did my mortgage payment go up if my rate is fixed?

Almost always because of escrow. Your rate and principal-and-interest stay fixed, but the property taxes and insurance collected into escrow rise over time; when they do, the lender raises the escrow portion of your payment to cover them.

Is an escrow account required?

Often yes — most lenders require one when your down payment is under 20%, and FHA loans always do.

With more equity you can sometimes waive it and pay taxes and insurance yourself, though the lender may charge a small fee to do so.

What is an escrow shortage?

When your actual tax or insurance bills come in higher than the lender collected, the account runs short. At the annual re-analysis the lender spreads that shortage across your next payments, which is a common reason a payment jumps.