An escrow (or impound) account is held by your lender to pay your property taxes and homeowners insurance on your behalf. Each month, a slice of the annual tax and insurance bills is added to your mortgage payment, the lender holds the money in the account, and pays the bills when they come due.
Escrow is required on most government-backed loans, on most loans with less than 20% equity, and on any loan where you elect it voluntarily. It exists to make sure taxes and insurance never lapse, which protects both you and the lender's collateral.
How it works
Your lender estimates your annual property tax and insurance bills, divides the total by twelve, and adds that amount to your monthly mortgage payment along with a small cushion allowed by law. The combined payment — principal, interest, taxes, and insurance — is what actually leaves your account each month.
Once a year, the lender performs an escrow analysis comparing what was collected to what was actually paid out. If your tax or insurance bills went up, your monthly payment increases to cover the new, higher costs. If they went down, you typically get a refund of the surplus and a slightly lower payment going forward.
You'll receive an annual escrow statement showing exactly what came in, what went out, and what changed for the year ahead — read it, because it's the clearest signal of whether your property taxes or insurance premiums are climbing.
When it matters to you
Escrow matters every time your property tax bill or insurance premium changes, because it directly changes your total monthly payment even though your loan's principal and interest amount hasn't moved.
It matters at tax and insurance renewal time especially — a jump in either one flows straight into next year's escrow payment, sometimes catching homeowners off guard if they weren't expecting the increase.
Common mistakes
- Assuming a mortgage payment will never change on a fixed-rate loan — the principal and interest portion is fixed, but the escrow portion moves with taxes and insurance.
- Ignoring the annual escrow statement and being surprised by a payment increase that was actually explained in a letter you didn't open.
- Switching homeowners insurance without notifying the lender, which can cause a mismatch in what the escrow account expects to pay.
- Paying off the loan and forgetting any remaining escrow balance is owed back to you — follow up if a refund doesn't arrive.
FAQs
Can I opt out of an escrow account?
Sometimes. Many conventional loans allow waiving escrow once you have enough equity, though government-backed loans (FHA, VA, USDA) generally require it. Ask your lender what's allowed on your specific loan.
Why did my mortgage payment go up if my rate is fixed?
Almost always because the escrow portion changed — property taxes or homeowners insurance increased, and your escrow account is now collecting more each month to cover the higher annual bills.
What happens if there's extra money in my escrow account?
After the annual escrow analysis, a surplus above what's legally allowed to be held as a cushion is typically refunded to you, and your monthly payment may be adjusted down for the coming year.