What Is a Mortgage Escrow Account?
A mortgage escrow account collects part of the property-tax and insurance costs with each payment so the servicer can pay those bills when they come due.
An escrow account separates part of each mortgage payment for property taxes and homeowners insurance. The mortgage servicer holds that money and pays the covered bills when they are due.
What the monthly payment includes
For most borrowers, the total monthly mortgage payment includes property taxes and homeowners insurance held in escrow, along with principal, interest, and any required mortgage insurance. Escrow does not pay down the loan balance.
Including escrow in the monthly payment lets the homeowner fund taxes and insurance gradually instead of managing separate large bills. The servicer pays the covered bills from the account when they are due, making those costs easier to include in a monthly budget.
How the escrow amount is estimated
The servicer estimates the property taxes and insurance premiums expected during the next 12 months, divides that amount across the monthly payments, and may maintain a permitted cushion. An annual escrow analysis compares the estimate with the bills and account activity.
Why the payment changes
A fixed interest rate does not freeze taxes or insurance. If either expense increases, the new monthly escrow deposit increases. A prior-year shortage can add a separate repayment amount until that shortage is collected. A surplus may reduce the required deposit or result in a refund, depending on the analysis.
Scenario
A homeowner has $4,200 in annual property taxes and a $1,440 annual insurance premium. The basic escrow estimate is $5,640 per year, or $470 per month. That $470 is added to the principal-and-interest payment and any other required monthly charges.
The next year, taxes rise by $600 and insurance rises by $240. Expected annual escrow expenses become $6,480, or $540 per month. The total mortgage payment rises by at least $70 per month even though the interest rate and principal-and-interest payment did not change. Any shortage from the prior year could temporarily increase it further.
Related lessons
What Happens After Your Offer Is Accepted?
Homebuyer Basics: From Pre-Approval to Closing
Related FAQs and articles
FAQ: How much cash do I need to buy a home?
Article: How Much Cash Do You Need to Buy a Home?
Separate the loan payment from the property costs
Review principal, interest, mortgage insurance, taxes, and insurance separately when comparing a payment or investigating an increase.
Sources
Consumer Financial Protection Bureau: What Is an Escrow or Impound Account?
Consumer Financial Protection Bureau: Principal and Interest vs. Total Monthly Payment
Consumer Financial Protection Bureau: Regulation X, Escrow Accounts