Jump to section: Escrow and home buying | Escrow and mortgages | Pros and cons | FAQ
When you pay a mortgage, part of your monthly payment often goes into an escrow account — a reserve your lender manages to cover your property taxes, homeowners insurance, and sometimes private mortgage insurance (PMI).
Each month, your lender sets aside one-twelfth of your estimated annual costs into the escrow account, then uses that money to pay the bills when they come due. Escrow keeps your taxes and insurance current without you having to remember due dates or save up for big lump-sum payments.
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Escrow and home-buying
When a seller accepts your offer on a house, you’ll usually put down some earnest money as a good faith deposit. That earnest money will stay in an escrow account until you close on the house or the deal gets called off. The money will go toward either your down payment or home buyer closing costs.
Escrow and mortgages
After closing on your house, your lender will create a new escrow account. Each month, your lender will set aside a portion of your mortgage payment to pay your annual property taxes, home insurance premiums, and private mortgage insurance (PMI).
Here’s how it functions:
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Monthly deposits: Each mortgage payment includes:
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Principal and interest (repaying your loan)
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Escrow portion (covering taxes and insurance)
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Initial deposit at closing: Lenders collect an upfront amount — usually several months of property taxes and one year of homeowners insurance — to seed your escrow account and ensure bills are paid on time from day one.
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Payments made for you: When your property tax or insurance bill arrives, your lender pays it directly using funds in your escrow account.
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Annual review: Once a year, your lender performs an escrow analysis to make sure enough money is collected.
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If costs increase (e.g., higher property taxes), your monthly payment rises to cover the difference.
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If you overpaid, you’ll receive a refund — typically if the surplus exceeds $50.
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Escrow cushion: Federal rules allow lenders to keep a two-month cushion to prevent shortages due to unexpected hikes.
| ✍ Editor's note Your lender can collect a little extra money to create an "escrow cushion" for unexpected hikes in expenses. But the escrow cushion can’t account for more than two monthly escrow payments. |
Escrow shortages and refunds
If your escrow balance runs low — say, because your taxes or insurance premiums increased — your lender will notify you and give you options:
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Pay the shortage in full, or
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Spread it out over the next 12 months by increasing your monthly payment.
If your escrow account ends the year with excess funds (usually > $50), your lender must refund you within 30 days of the analysis.
You can't borrow or withdraw funds from an escrow account.
Is an escrow account required for my mortgage?
Escrow accounts are pretty standard, and many lenders and loan programs (including FHA loans) require you to keep an escrow account until you have at least 20% equity.
If you don't want an escrow account, you should work with a lender that doesn't require one, make a 20% down payment, or close the account once you pay off 20% of your home value.
You may request an escrow waiver once you've built 20% equity and made on-time payments, but some lenders charge a small fee or slightly higher interest rate for the added risk.
Is escrow a good idea?
| ✅ Pros | ❌ Cons |
| Easier budgeting | Higher monthly payment |
| No missed/late tax or insurance bills | Limited control over when bills are paid |
| Lender handles due dates and increases | Refunds or shortages can cause yearly payment swings |
| Often required for low-down-payment loans | May take time to remove once you reach 20% equity |
If you don’t want to worry about saving up enough money for annual taxes or insurance, an escrow account will let you make smaller monthly payments rather than handing over annual lump sums.
With an escrow account, you pay your lender a little more each month to automatically make property tax, home insurance, and fee payments for you. And if your lender makes a late payment, they'll pay that fee as well.
Some homeowners prefer to keep more cash on hand throughout the year and then budget for annual payments themselves. So if you want more control over your money and have at least 20% equity, you can nix the escrow account.
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Learn MoreFAQ
Is an escrow account a good idea?
An escrow account can be a good idea for people who want to make it easier to budget for the large annual costs of homeowners insurance and property taxes. Many lenders require an escrow account, though, so you may not have a choice until you have at least 20% in home equity.
Can I modify my homeowner's insurance policy after closing?
Yes — just make sure you notify your lender that you changed your homeowner’s insurance policy so that it can adjust your escrow payments.
Can I withdraw funds from my escrow account?
No, you cannot withdraw funds from your escrow account.
Do I need to send a copy of my tax bill to my mortgage company?
Some banks require you to send a copy of your tax bill, but plenty don’t. Ask your specific mortgage servicer if it needs a copy of your tax bill.
What happens if my escrow account runs short?
Your lender will notify you and either let you pay the shortage in a lump sum or add it to upcoming payments.
Do escrow accounts earn interest?
In most states, no. Only a few (such as California and Massachusetts) require lenders to pay minimal interest.
Can I remove my escrow account?
Yes — typically after reaching 20% equity and a solid on-time payment history. Ask your servicer if they charge an escrow-waiver fee.
Does refinancing affect my escrow?
Yes. When you refinance, your old lender refunds any remaining escrow balance within 30 days. Your new loan will establish a fresh escrow account at closing.
