What Is an Escrow Account?
If you have a mortgage, part of your monthly payment may go into an escrow account. This is a separate account your lender or servicer uses to pay your property taxes and homeowners insurance on your behalf. Understanding how it works helps explain why your payment can change from year to year.
How a Mortgage Escrow Account Works
When you have an escrow account, your monthly mortgage payment includes more than just principal and interest. Each month, the servicer collects an extra amount and sets it aside. When your property tax and insurance bills come due, the servicer pays them from this account.
This is often described with the shorthand PITI, which stands for Principal, Interest, Taxes, and Insurance. The taxes and insurance portions are the parts handled through escrow. Spreading these large annual bills across twelve monthly payments makes budgeting easier than paying a big lump sum once or twice a year.
What an Escrow Account Typically Covers
Escrow accounts most often handle:
- Property taxes owed to your local government.
- Homeowners insurance premiums that protect the property.
- Mortgage insurance, such as PMI, when it applies.
- Flood insurance if the home is in a designated flood zone.
It generally does not cover utilities, HOA dues, or repairs, which you continue to pay separately.
Why Lenders Require Escrow
Lenders use escrow to protect their investment in your home. Unpaid property taxes can become a lien that takes priority over the mortgage, and a lapsed insurance policy could leave the property unprotected. By collecting these costs monthly and paying the bills directly, the servicer ensures they stay current. Many loans, especially government-backed and lower-down-payment loans, require an escrow account, while some conventional borrowers with significant equity may be allowed to waive it.
Why Your Monthly Payment Can Change
Your principal and interest usually stay the same on a fixed-rate loan, but the escrow portion can shift. If your property taxes go up or your insurance premium rises, the servicer collects more to cover the higher bills, and your total payment increases. The reverse is also true when those costs fall.
Each year the servicer performs an escrow analysis to compare what was collected against what was actually paid. This can result in:
- A shortage, if the bills came in higher than expected, leading to a higher monthly payment or a request for a lump-sum payment.
- A surplus, if too much was collected, which is typically refunded to you.
Managing Your Escrow Account
A few practices help you stay on top of escrow:
- Review the annual statement so you understand how your payment was calculated.
- Confirm bills are paid on time by checking that taxes and insurance show as current.
- Shop your insurance periodically, since a lower premium reduces the escrow portion of your payment.
- Watch for tax reassessments, which can change your bill after a purchase or a local rate change.
When you estimate a monthly payment, remember to factor in taxes and insurance, not just principal and interest. The main mortgage calculator lets you include these costs so your estimate reflects the full payment you'll actually make each month.
