Mortgage Escrow Accounts: How Taxes and Insurance Are Paid

What escrow does

The CFPB describes an escrow account, called an impound account in some places, as an account your lender sets up to pay certain property expenses. Part of each monthly mortgage payment goes into it, and your servicer pays the bills when they come due. Most often that means:

• Property taxes
• Homeowners insurance
• Mortgage insurance, and sometimes flood insurance

The CFPB notes that many lenders require escrow for taxes and insurance so they can be sure the bills get paid, and that escrow is sometimes required by law.

How the monthly amount is set

Monthly escrow ≈ (yearly property tax + yearly insurance) ÷ 12, plus any cushion or shortage repayment

At closing you usually make an initial deposit to get the account started; it appears on your Loan Estimate and Closing Disclosure as an escrow item.

Why your payment changes

A fixed-rate loan fixes principal and interest. It does not fix taxes or insurance. The CFPB says that when your property taxes and insurance premiums change from year to year, your escrow payment and your total monthly payment change too. Common causes:

• A new assessment or tax rate after you buy.
• Insurance premium increases at renewal.
• The end of a tax exemption or the start of a new one.

The annual escrow analysis

Under the CFPB's Regulation X, section 1024.17, the servicer reviews the account each year and sends an annual escrow account statement within 30 days of the end of the escrow year. The statement shows what came in, what was paid out, and the projection for the next year.

Cushion. The servicer may keep a cushion, but it can be no more than one-sixth of the estimated total yearly payments from the account, roughly two months of escrow.

Surplus. If the analysis shows a surplus of $50 or more and you are current on payments, the servicer must refund it within 30 days. Under $50, it may refund it or credit it to next year.

Shortage. If the account will run short, the rule lets the servicer choose among options. When the shortage is at least one month's escrow payment, it can leave it, ask you to repay within 30 days, or spread repayment over at least 12 months. Smaller shortages can be left, repaid within 30 days, or spread over two or more months.

If you don't have escrow

The CFPB's advice is to plan for these large bills yourself, because unpaid property taxes can lead to penalties, a tax lien and even foreclosure. If you don't keep insurance in force, the lender may buy force-placed insurance and bill you for it, which the CFPB says is typically more expensive than coverage you buy yourself. Even when escrow is optional, the CFPB suggests considering it, since small monthly amounts are easier to budget than a large bill.

Escrow when you sell or refinance

When a loan is paid off, the old servicer closes the escrow account and refunds any remaining balance to you. On a refinance you usually fund a new escrow account at closing, so cash flows both ways for a few weeks.

Checking your escrow

• Compare your tax bill and insurance declaration page with the amounts the servicer paid.
• Read the annual statement for the projected low point and the cushion.
• If something looks wrong, contact your servicer in writing.

Our payment calculator includes taxes and insurance so you can see the full monthly amount before you buy. This guide is educational, not legal advice.

Common questions

Can I skip escrow?

Sometimes. Many lenders require escrow, and some loans require it by law. If yours is optional, the CFPB suggests considering it anyway, because it spreads big bills into monthly amounts.

Why did I get an escrow refund?

The annual analysis found more money in the account than needed. Federal rules require a refund of surpluses of $50 or more within 30 days if your payments are current.

Does escrow earn interest?

It depends on your state's law and your loan documents. Ask your servicer.