What Is Escrow?

An escrow account is a holding account your lender manages so your property taxes and homeowners insurance are paid on time automatically. A portion of each monthly mortgage payment goes into escrow, and your lender disburses those funds when the bills are due, typically once or twice per year.

For example, if your annual property taxes are $4,800 and homeowners insurance is $1,800, your lender collects an extra $550 per month ($6,600 ÷ 12) on top of your principal and interest payment. At closing, you also fund an escrow cushion—usually two to three months of reserves—so the account has enough to cover the first bills. Your lender reviews the account annually and adjusts your payment if taxes or insurance change.

Key Facts

• Monthly collection: Your lender divides annual tax and insurance costs by 12 and adds that to your payment
• Cushion limit: Federal law (RESPA) allows lenders to hold a maximum two-month cushion in escrow
• Annual analysis: Your lender reviews escrow once per year and adjusts your payment for any shortages or surpluses
• Required for most loans: FHA, VA, and USDA loans require escrow; conventional loans may waive it with 20%+ equity
• Shortage options: If your escrow is short, you can pay the difference in a lump sum or spread it over 12 months

Frequently Asked Questions

Can I cancel my escrow account?

Some lenders allow you to cancel escrow on a conventional loan once you reach 20% equity and have a good payment history. FHA, VA, and USDA loans typically require escrow for the life of the loan. Canceling means you become responsible for paying taxes and insurance directly.

Why did my mortgage payment go up if I have a fixed rate?

Your interest rate is fixed, but your escrow amount can change. If your property taxes increase or your insurance premium rises, your lender adjusts the escrow portion of your payment during the annual analysis to cover the higher costs.