An escrow account holds money your lender collects from you each month to pay property taxes and insurance

When you have a mortgage, your monthly payment usually includes four parts: principal, interest, taxes, and insurance. Your lender collects the tax and insurance portions into a separate account called an escrow account. The lender then pays your property taxes and homeowners insurance directly from that account when the bills come due. You do not pay these bills yourself — the lender handles it.

This arrangement protects the lender. If you stopped paying property taxes, the government could place a lien on the house and eventually foreclose. If your home burned down and you had no insurance, the lender's collateral would be gone. By holding the money in escrow, the lender ensures these obligations stay current.

Escrow accounts are standard on mortgages where you put down less than 20 percent. If you put down 20 percent or more, the lender may not require an escrow account, though some still do. Even if not required, many borrowers choose escrow because it simplifies budgeting — one payment covers everything.

Key Takeaways

  • Your lender collects one-twelfth of your annual property taxes and insurance costs each month and holds the money in escrow until the bills are due.
  • Escrow accounts are required on most mortgages with less than 20 percent down and optional on mortgages with 20 percent or more down.
  • Your lender sends you an escrow statement once a year showing what was collected, what was paid out, and what balance remains.
  • If your escrow account runs short because taxes or insurance rose, your lender will increase your monthly payment to rebuild the cushion.
  • You can request removal of escrow if you meet your lender's requirements, usually 20 percent equity and a good payment history.

How the escrow payment is calculated

Your lender estimates your annual property taxes and homeowners insurance, adds them together, and divides by 12. That number becomes part of your monthly mortgage payment. For example, if your property taxes are $2,400 per year and insurance is $1,200 per year, the escrow portion of your payment would be $300 per month.

These are estimates. When the actual bills arrive, the amount may be higher or lower. If taxes or insurance increase, your lender recalculates and raises your monthly payment. If they decrease, your payment goes down. Your lender must send you an escrow statement every year showing the calculation.

Lenders typically keep a small cushion in the escrow account — usually one or two months' worth of payments. This buffer covers timing gaps between when you pay and when the bills are due. If the account falls below the required cushion, your lender will increase your payment to rebuild it. If it grows too large, your lender may refund the excess or credit it against future payments.

What happens when taxes or insurance change

Property tax assessments can jump when your home is reassessed or your local government raises rates. Homeowners insurance premiums rise when claims increase in your area, when you file a claim, or when your insurer straightforward decides to raise rates. When either happens, your escrow account may not have enough to cover the new bill.

When this occurs, your lender recalculates your escrow payment and notifies you of the increase. You will see the higher amount on your next mortgage statement. Some lenders allow you to pay the shortfall in one lump sum, while others spread it over the remaining months of the year. Check your escrow statement to see which option your lender offers.

The opposite can happen too. If your property taxes drop or you switch to a cheaper insurance company, your escrow payment may decrease. Your lender will adjust your monthly payment downward and may refund any excess balance, though some lenders credit it instead.

Reading your escrow statement

Once a year, your lender sends you an escrow statement. It shows three key numbers: the amount collected from you during the year, the amount paid out for taxes and insurance, and the remaining balance. The statement also lists the estimated taxes and insurance for the coming year and shows how your monthly payment will change.

The statement may show a shortage or a surplus. A shortage means the account did not have enough to cover the bills that came due. A surplus means you paid more than necessary. Lenders are required to disclose shortages and explain how they will be made up — usually by raising your next payment. Surpluses over a certain amount (the rules vary by state) must be refunded or credited within 30 days.

If you disagree with the numbers on your escrow statement, contact your lender in writing. Ask them to show you the actual tax and insurance bills they paid. Lenders sometimes make errors in their estimates, and you have the right to challenge them.

Removing escrow from your mortgage

If you have built up 20 percent equity in your home and have a good payment history, you can ask your lender to remove the escrow requirement. Once removed, you pay property taxes and homeowners insurance directly to the tax assessor and insurance company instead of through your lender.

Your lender is not required to remove escrow just because you ask. They can set their own standards, which often include a minimum credit score, a certain number of on-time payments, and proof of homeowners insurance. Some lenders will remove escrow; others refuse on principle. Call your lender and ask what their policy is.

Removing escrow lowers your monthly mortgage payment because you are no longer paying the tax and insurance portions to your lender. However, you now have to remember to pay these bills yourself and budget for them separately. If you miss a payment, the consequences are the same as before — tax liens and insurance lapses — but now you bear the responsibility.

What escrow does not cover

Escrow accounts only hold money for property taxes and homeowners insurance. They do not cover mortgage insurance (PMI), homeowners association fees, or utilities. If your mortgage requires PMI because you put down less than 20 percent, that payment stays separate from escrow and continues until you reach 20 percent equity.

If you live in a community with a homeowners association, HOA fees are not part of escrow. You pay those directly to the association. The same applies to utilities, which are your responsibility to pay to the utility company.

Frequently Asked Questions

Can I pay my property taxes and insurance myself instead of using escrow?

Only if your lender allows it. Most lenders require escrow on mortgages with less than 20 percent down. If you have 20 percent or more equity and your lender permits it, you can request removal. Once removed, you pay the bills directly, but you must keep current or risk liens and foreclosure.

What if my escrow account runs out of money before the bills are due?

Your lender covers the shortage and then increases your monthly payment to rebuild the account. You will see this as a higher escrow payment on your next statement. Some lenders allow you to pay the shortfall in one lump sum instead of spreading it over months.

Why did my property tax bill not match what my lender estimated?

Lenders estimate taxes and insurance based on the previous year's bills. If your assessment changed, your tax rate changed, or your insurance company raised rates, the actual bill will differ. Your lender adjusts the escrow payment the following year to match the new amount.

Do I get interest on money sitting in my escrow account?

No. Escrow accounts do not earn interest. The money sits in a non-interest-bearing account until your lender pays the bills. This is one reason some borrowers prefer to remove escrow and manage taxes and insurance themselves.

What happens to my escrow account if I refinance?

Your old lender closes the escrow account and refunds any remaining balance. Your new lender opens a new escrow account and collects money based on their estimate of your taxes and insurance. The transition usually takes a few weeks.