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Escrow
Escrow is an account managed by your mortgage servicer that collects and pays your property taxes and homeowners insurance on your behalf as part of your monthly mortgage payment.
How It Works
Escrow serves two purposes in real estate. During a home purchase, an escrow account held by a neutral third party holds the buyer's earnest money deposit until closing. After closing, your mortgage servicer maintains an escrow account to pay property taxes and homeowners insurance. Each month, a portion of your mortgage payment goes into escrow. When tax and insurance bills come due, the servicer pays them from this account. Lenders require escrow because unpaid taxes create liens that could supersede the mortgage, and lapsed insurance leaves the property unprotected. Your escrow payment is recalculated annually — if taxes or insurance increase, your monthly payment goes up. Escrow accounts must maintain a minimum balance (typically two months of payments) as a cushion.
Key Facts
Collects property taxes and homeowners insurance monthly
Paid as part of your total monthly mortgage payment (the T and I in PITI)
Recalculated annually — payment can increase if taxes/insurance rise
Required by most lenders, especially with LTV above 80%
Servicer must provide an annual escrow analysis statement
Escrow shortages can be paid as a lump sum or spread over 12 months
Example
Your property taxes are $6,000/year and homeowners insurance is $1,800/year. Total annual escrow: $7,800. Monthly escrow payment: $650. This is added to your principal and interest payment. If taxes increase to $6,600, your escrow payment rises to $700/month.
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Frequently Asked Questions
Some lenders allow escrow waivers if your LTV is below 80%, but they may charge a fee (typically 0.25% of the loan amount). You'd then be responsible for paying taxes and insurance directly. Most borrowers keep escrow for convenience.
The most common reason is an escrow adjustment. When property taxes or insurance premiums increase, your servicer raises the escrow portion of your payment to cover the higher costs. You'll receive an annual escrow analysis explaining any changes.