An escrow account is a holding account your mortgage servicer uses to pay your property tax and homeowners insurance (and sometimes mortgage insurance or flood insurance) on your behalf. Each month, part of your payment goes into it; when the bills come due, the servicer pays them.
How the monthly escrow amount is set
The servicer estimates the year's bills and divides by 12. With a $4,200 tax bill and a $1,800 insurance premium, that is $500 a month on top of principal and interest. Federal rules also allow a cushion of up to one-sixth of the yearly total — here about $1,000 — to cover increases.
The annual escrow analysis
Once a year the servicer compares what it collected with what it paid and what it expects to pay next year, and sends you an escrow statement:
- Shortage: taxes or insurance went up, so the account ran low. You can pay the shortage in one lump or spread it over the next 12 payments, and the new monthly deposit is higher.
- Surplus: the account holds more than needed. Surpluses of $50 or more are generally refunded.
That is why a fixed-rate mortgage payment can change: the principal-and-interest part never moves, but the escrow part follows your tax and insurance bills.
Escrow at closing
When you buy or refinance, the lender collects an initial escrow deposit at closing so the account can pay the first bills on time, plus the allowed cushion. That is one reason cash to close is higher than the down payment and closing costs alone. When you refinance, the old servicer refunds the balance of the old escrow account, usually within a few weeks, which offsets the new deposit.
Keeping it predictable
- Shop homeowners insurance before renewal; a lower premium lowers escrow at the next analysis.
- Check your property tax assessment and appeal it if it is out of line.
- Once PMI is removed, confirm the escrow or payment amount drops — see the PMI removal calculator.
When budgeting for a home, include tax and insurance in the payment from the start: the mortgage calculator adds them to principal and interest, and the 28/36 rule counts them as housing cost. The CFPB has a plain-language explainer on escrow accounts.