How escrow accounts are used

An escrow account (also called an impound or tax-and-insurance account) temporarily holds money collected by a title company, escrow company, or mortgage servicer and then pays property-related bills when they’re due. Lenders commonly require an escrow account for borrowers with lower down payments or when taxes and insurance are likely to be missed. (See CFPB guidance on escrow accounts: https://www.consumerfinance.gov/ask-cfpb/what-is-an-escrow-account-en-1798/.)

What escrow accounts typically pay for

  • Property taxes
  • Homeowners insurance (HOI) and, where required, flood insurance
  • Private mortgage insurance (PMI) premiums if included in the loan terms
  • Occasionally, county assessments or condo/HOA fees if the lender or servicer agrees

Items not usually paid from mortgage escrows include utilities, routine maintenance, and most HOA dues unless contractually arranged.

How payments are collected and calculated

Most servicers collect a portion of your annual tax and insurance costs each month as part of your mortgage payment. Example:

  • Annual property tax bill: $3,000
  • Annual homeowners insurance: $1,200
  • Annual total = $4,200 → monthly escrow contribution = $350

Your lender or servicer performs an annual escrow analysis to estimate next year’s bills, adjust your monthly contribution, and disclose any shortages or surpluses. Federal rules (RESPA/Regulation X) require servicers to provide an annual escrow statement showing activity and projected payments (see CFPB/RESPA information: https://www.consumerfinance.gov/).

Special rules and common terms

  • Initial escrow deposit: Lenders may require an initial deposit at closing to fund the account.
  • Cushion: Regulators allow servicers to maintain a cushion (up to 1/6 of annual escrow payments) to cover timing differences; this is often called the two‑month cushion.
  • Shortage vs. surplus: A shortage occurs when disbursements exceed funds on hand; you may need to pay the shortage or have it spread across monthly payments. A surplus may be refunded if it’s above a set threshold.

Who holds escrow funds and are they insured?

Escrow funds can be held by a bank, mortgage servicer, title or escrow company, or attorney trust account. If funds are held in a deposit account at an FDIC‑insured bank, they’re protected up to the applicable FDIC limits (see FDIC: https://www.fdic.gov/). If held by a private escrow or title company, coverage depends on that entity’s trust-account practices—ask the escrow holder for specifics.

Real-world example

At closing a buyer pays $5,000 into escrow as an initial deposit to cover upcoming property tax and insurance payments. The mortgage servicer then collects a monthly escrow portion (e.g., $350) and pays the tax bill when it’s due. If the tax bill rises, the servicer’s next annual escrow analysis adjusts the monthly amount and notifies the borrower.

Common mistakes and misconceptions

  • Assuming escrow covers all home-related bills. It usually covers taxes and insurance only unless expressly arranged.
  • Believing escrow funds are automatically safe from loss. Protection depends on where funds are held—confirm FDIC coverage or trust-account safeguards.
  • Overlooking the annual escrow analysis. Failure to review the statement can lead to unexpected increases in monthly payments.

Practical tips from a financial expert

  • Read your escrow disclosure and annual statement the first time you get them; they show expected payments and any cushion the servicer keeps.
  • If you see a large shortage, contact the servicer to discuss payment options or to verify billing accuracy.
  • When contesting a tax or insurance charge, notify both the taxing authority/insurer and your servicer so disbursements can be paused or adjusted when appropriate.

When to ask for changes

  • If you’re building equity and prefer to manage taxes and insurance yourself, check your mortgage documents for a clause allowing escrow waiver requests—some lenders permit waivers for borrowers who meet certain equity or credit criteria.
  • If property taxes jump, review local appeal deadlines and your servicer’s options for spreading a shortage over future months. See our related guide on negotiating escrow after a tax increase: “Negotiate Your Mortgage Escrow After a Property Tax Increase” (https://finhelp.io/glossary/negotiate-your-mortgage-escrow-after-a-property-tax-increase/).

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Frequently asked questions

Q: Can I avoid an escrow account?
A: Some lenders allow escrow waivers for qualified borrowers; others require escrow for low down payments or government‑backed loans.

Q: Who decides what the escrow pays?
A: The escrow agreement and your mortgage note define which bills the servicer will pay from the account.

Q: What happens to escrow funds when I refinance or sell?
A: If you refinance, the old servicer should return any surplus to you; at sale/closing the escrow balance is reconciled and refunds or charges are applied as required.

Sources and disclaimer

Sources: Consumer Financial Protection Bureau (CFPB) on escrow accounts and RESPA; FDIC guidance on deposit insurance. (CFPB: https://www.consumerfinance.gov/; FDIC: https://www.fdic.gov/.)

This content is educational and not personalized financial or legal advice. For decisions specific to your situation, consult a licensed mortgage professional, attorney, or financial advisor.