What is a mortgage escrow account?
Your mortgage payment may include money for property taxes and insurance as well as repayment of the loan. A mortgage escrow account, also called an impound account, holds the portion intended for designated property bills. Your mortgage servicer collects the money and pays those bills from the account.
Escrow can make large expenses easier to budget for. The bills still need to be paid and your total payment can change. CFPB: Escrow and impound accounts.
Two meanings of escrow
During a purchase, transaction escrow can refer to a neutral party holding funds and documents while the parties satisfy the conditions for closing. The ongoing mortgage account discussed here collects money over time for specified property expenses.
Ask which meaning applies when someone mentions an escrow payment or escrow fee. A settlement-service charge and money deposited for future tax bills are different items. California DRE: The homebuying process and transaction escrow.
What does the mortgage account pay?
Property taxes and homeowners insurance are common escrow items. Other required insurance or property charges may be included depending on the loan and account arrangement.
Review your Closing Disclosure for the charges included in escrow and the ones you must pay directly. HOA dues may be paid separately. Utilities, maintenance and repair savings also belong in your own budget. CFPB: Reviewing estimated taxes, insurance and assessments.
How the monthly amount works
A starting estimate divides the expected annual bills by 12. This invented example shows the contribution for two bills.
A hypothetical tax-and-insurance example
- Annual property taxes
- $7,200
- Annual homeowners insurance
- $1,800
- Total for these two annual bills
- $9,000
- Annual total divided by 12 months
- $750 per month
The $750 contribution covers these example bills only. It excludes the starting deposit, any cushion, shortage repayment and other escrow items. It is not a complete mortgage payment, an insurance quote or a tax estimate for a particular property.
Include the loan's principal and interest, any mortgage insurance and other housing costs when reviewing the full budget. CFPB: Principal and interest versus the total monthly payment.
Why you may deposit money at closing
Monthly contributions begin on a schedule while tax and insurance bills have their own due dates. The account may need an initial deposit so enough money is available when a bill arrives.
The initial deposit and an escrow cushion serve different purposes. A cushion is an additional reserve. For mortgages covered by the federal escrow rule, the permitted cushion is generally no more than two months of estimated escrow disbursements. A lower limit may apply under state law or the mortgage documents. A cushion is not always required.
The full opening deposit can be greater because money needed for scheduled bills is separate from the cushion. Ask for the initial escrow analysis and an explanation of the deposit. Your actual opening amount depends on the bill schedule and applicable rules. CFPB: Limits on escrow collections.
Why your payment can change
Property taxes and insurance premiums can change. Even when the principal-and-interest payment on a fixed-rate loan stays the same, the escrow portion can move.
The servicer compares the money collected and paid out with the next period's expected needs. For loans covered by the federal escrow rule, an annual analysis and statement are generally required subject to applicable exceptions. The review can identify a shortage or surplus relative to the required balance.
A higher payment may reflect both a new estimate for upcoming bills and repayment of a shortage. Ask the servicer to explain the two parts separately. A shortage can occur when costs change. The statement should explain how any shortage or surplus is being handled under the applicable rules. CFPB: Escrow analysis, statements and adjustments.
Escrow account pros and cons
When you have a choice, consider your budgeting habits alongside the loan's requirements.
Monthly budgeting
Potential advantage: Contributions spread large bills across monthly payments.
Tradeoff: The amount can change as estimates and actual expenses change.
Bill scheduling
Potential advantage: The servicer arranges payment of included bills.
Tradeoff: You should still check that the correct bills were paid on time.
Money set aside
Potential advantage: Funds accumulate for designated property expenses.
Tradeoff: That money is unavailable for ordinary spending or other savings goals.
Fewer direct payments
Potential advantage: Fewer separate property bills may need your direct payment.
Tradeoff: You still need a budget for costs outside escrow.
Managing bills yourself gives you more direct control over when you set money aside. It also requires enough savings, accurate due-date tracking and timely payments. Ask how each available arrangement fits your habits. CFPB: Budgeting with or without escrow.
Can you waive or remove escrow?
Whether you can pay property taxes and insurance directly depends on your loan program, lender and applicable requirements.
- FHA
- Standard FHA purchase and refinance mortgages require escrow for property taxes and required insurance. An ordinary borrower-requested escrow waiver is not available.
- VA
- VA itself does not require a tax-and-insurance escrow account. Some lenders allow eligible borrowers to pay these bills directly; others require escrow. Ask whether your specific loan qualifies under the lender's requirements and applicable law.
- Conventional
- Some lenders allow tax-and-insurance escrow waivers at closing on eligible conventional loans with a loan-to-value ratio as high as 95%. Availability depends on the lender, loan program, credit qualifications, property location and applicable law.
Loan-to-value, or LTV, compares the loan amount with the property value used for the mortgage. Waiving tax-and-insurance escrow does not remove any required mortgage insurance.
Removing PMI and waiving a tax-and-insurance escrow account are separate decisions. See our guide to removing PMI for the insurance rules and questions to ask your servicer.
Program references: FHA escrow requirements; VA handbook: Escrows; Fannie Mae: Conventional waiver policies; UWM: Lender-specific waiver eligibility.
With an approved waiver, you are responsible for paying the designated property taxes and insurance directly and on time. The expenses remain part of your housing budget.
Removing an existing escrow account after closing follows the servicer's requirements and may have different eligibility rules. Get written confirmation of approval, the effective date, which bills you must pay directly and how any remaining escrow balance will be handled. Continue following your current payment instructions until the lender or servicer confirms the change. Fannie Mae: Existing escrow accounts and waiver requests.
What to check before and after closing
Before closing, ask:
- Which expenses are included and which will I pay separately?
- What estimates were used for taxes and insurance?
- How much is the starting deposit and does it include a cushion?
- Is escrow required for this loan? If a waiver is available, which bills will I pay directly?
- Who should receive a bill or insurance notice after closing?
After closing, review your mortgage statements, escrow analysis, tax bills and insurance notices. Contact the servicer promptly if a bill appears unpaid, the wrong policy or property is listed or a payment change is unexplained.
If a tax authority or insurer sends an overdue notice, contact it as well. Follow up with the servicer to confirm how the issue will be resolved. CFPB: Escrow-account problems and next steps.
For a California or Texas home, use property-specific information. Ask how the tax estimate accounts for your purchase or completed construction and how any approved exemption will be documented. Confirm the amount the servicer will use rather than relying only on a seller's bill or an expected exemption.
Put escrow into your full mortgage comparison
Read our closing-cost guide to distinguish cash needed at closing from ongoing expenses. Use the preparation guide to organize your questions.
Explore California mortgage options or Texas mortgage options. When comparing payments, confirm which tax and insurance assumptions each result includes.
Use the payment and amortization tools to explore a housing budget. Confirm which expenses are included before relying on a result.