Escrow is usually included in your mortgage payment, but not always
When you get a mortgage, your monthly payment typically bundles together principal, interest, property taxes, homeowners insurance, and mortgage insurance (if you put down less than 20 percent). That bundled amount is what you send to your lender each month. Escrow — the account where your lender holds money for taxes and insurance — is funded from your payment, not separate from it.
The key word is "usually". If you own your home outright or have paid off enough of the loan, you may not have escrow at all. If you refinance or your loan terms change, escrow can be removed or added. The structure depends on your specific loan agreement and how much equity you have.
Key Takeaways
- Your monthly mortgage payment almost always includes an escrow portion that your lender sets aside for property taxes and homeowners insurance.
- The lender calculates the escrow amount by estimating annual taxes and insurance, dividing by 12, and adding that to your principal and interest payment.
- Escrow is required if you have a conventional loan with less than 20 percent down, an FHA loan, or a VA loan — lenders use it to protect their investment.
- Your escrow account balance can change each year when taxes or insurance costs rise, which may increase your monthly payment even if interest rates stay the same.
- You can request escrow removal once you reach 20 percent equity on a conventional loan, but the lender can refuse if your payment history is weak.
How escrow gets folded into your payment
Your lender estimates what you will owe in property taxes and homeowners insurance over the next year. They add those estimates together, divide by 12, and include that monthly amount in your mortgage payment. That money goes into an escrow account held in your name but controlled by the lender.
When property taxes are due, the lender pays them from escrow. When your insurance premium comes due, the lender pays that too. You never write those checks yourself — the lender handles it. This protects the lender's collateral: if taxes go unpaid, the county can place a lien on the property. If insurance lapses, the house is unprotected.
The escrow portion of your payment is not interest or principal. It does not build equity. It is money held in trust, moving directly from your account to the county and the insurance company on a schedule set by those entities, not by you.
When escrow is required and when it is optional
Escrow is mandatory for most borrowers. If you have a conventional loan and put down less than 20 percent, your lender requires escrow. FHA loans require it. VA loans require it. USDA loans require it. The reason is the same across all of them: the lender has not yet recouped enough of their money to absorb the risk of unpaid taxes or a lapsed insurance policy.
Once you reach 20 percent equity on a conventional loan, you can request that escrow be removed. The lender is not obligated to agree — they can refuse if you have missed payments, if your credit score has dropped, or if they straightforward choose to keep it. Some lenders remove it automatically; others require you to ask in writing.
If you refinance, escrow terms can change. A new lender may require escrow even if your old one did not. A cash-out refinance that reduces your equity below 20 percent will trigger a requirement for escrow to return.
What happens when taxes or insurance costs change
Once a year, usually in the fall or winter, your lender reviews the escrow account. They look at what they actually paid out for taxes and insurance, compare it to what they estimated, and recalculate the next year's monthly escrow amount. If taxes went up or your insurance premium increased, your monthly payment goes up too — even if your interest rate and loan balance have not changed.
This is called an escrow analysis. The lender sends you a statement showing the old payment, the new payment, and the reason for the change. If there is a surplus in the account (they overestimated), they may credit it toward next year's payments or send you a refund. If there is a shortage (they underestimated), they may ask you to pay a lump sum or spread the difference across the next 12 months.
Property tax increases are the most common driver of payment increases. A reassessment, a change in your local tax rate, or a new bond measure can all raise your annual tax bill. Insurance premiums rise when claims increase in your area, when you add coverage, or when your insurer straightforward raises rates. Neither of these is within your lender's control, but both flow directly into your monthly payment.
The difference between escrowed and non-escrowed payments
If you have escrow, your monthly payment is a single amount that covers everything: principal, interest, taxes, insurance, and mortgage insurance if applicable. You send one check (or set up one automatic transfer) and the lender distributes the pieces.
If you do not have escrow, you pay the lender only for principal, interest, and mortgage insurance. You pay property taxes directly to the county, usually twice a year. You pay homeowners insurance directly to your insurance company, usually once or twice a year. You are responsible for making sure those payments arrive on time.
Non-escrowed payments give you more control — you can shop for a cheaper insurance policy or dispute a tax assessment without the lender's involvement. They also mean you have to track multiple due dates and write multiple checks. Many borrowers prefer the simplicity of escrow, even though it means the lender controls the timing and the account.
How to read your escrow section on the mortgage statement
Your monthly statement breaks down the payment into line items. Principal and interest are usually listed first. Below that, you will see escrow listed as a single amount or broken into sub-items: property taxes, homeowners insurance, and sometimes mortgage insurance or HOA fees if those are escrowed too.
The statement also shows the escrow account balance — how much money is sitting in the account at that moment. This balance should be positive but not huge. Lenders typically keep a two-month cushion, so the balance might be 1/6 of your annual tax and insurance costs. If the balance is very high, you may be overpaying each month. If it is very low or negative, you may be underpaying.
Once a year, the escrow analysis statement will show you the old balance, the amount paid out during the year, the amount you paid in, and the new balance. This is the clearest picture of how the account actually works.
Removing escrow from your payment
To remove escrow on a conventional loan, contact your lender and ask for escrow waiver or escrow removal. You will need to show that you have at least 20 percent equity in the home. The lender will verify this using the current market value of the property, not the purchase price.
The lender may ask for proof of homeowners insurance before they agree — they want to know you will keep the policy in force without their oversight. They may also charge a fee to process the removal, though this is not universal.
Once escrow is removed, your monthly payment drops. The amount of the drop equals the monthly escrow portion. You then become responsible for paying taxes and insurance on your own schedule. If you miss a payment, there is no lender to catch it, and the consequences — a tax lien or a lapsed insurance policy — fall on you.
Frequently Asked Questions
Can my escrow payment go down?
Yes, if property taxes or insurance premiums decrease in your area. This is rare but happens. More commonly, escrow payments stay flat or rise year to year. When they do drop, the lender may credit the difference to your account or refund it to you, depending on the size of the surplus.
What if I disagree with the escrow analysis?
You can request that your lender recalculate it. Bring documentation of your actual tax bill or insurance premium if you believe the estimate is wrong. The lender must review your request, but they are not required to change the amount if their calculation is reasonable. If you believe there is an error, you can also contact your state's banking regulator.
Does escrow money count toward paying off my loan?
No. Escrow is held in trust and paid out to third parties — the county and the insurance company. Only the principal portion of your payment reduces your loan balance and builds equity.
What happens to my escrow account if I sell the house?
When you sell, the lender pays off the loan from the sale proceeds. Any remaining balance in the escrow account is refunded to you, usually within a few weeks of closing. The new owner and their lender will set up a new escrow account.
Can I pay my taxes and insurance myself even if escrow is required?
No. If escrow is required by your loan agreement, the lender will not allow you to opt out. You must pay the escrow amount each month, and the lender will handle the actual tax and insurance payments. Trying to pay separately can trigger a loan violation.