Overview

An escrow account (sometimes called an impound or reserve account) is a holding account your mortgage servicer uses to collect and pay on your behalf recurring property-related expenses — most commonly property taxes and homeowners insurance. Lenders use escrow accounts to protect their collateral and ensure bills are paid on time; homeowners benefit by spreading big annual bills into monthly deposits.

(For federal rules and consumer guidance on escrow accounts, see the Consumer Financial Protection Bureau (CFPB).)

How an escrow account is established and funded

  • At closing, your lender may set up an escrow account and calculate a monthly escrow payment based on estimated annual taxes, insurance premiums, and a small cushion.
  • Each month a portion of your mortgage payment is deposited into the account until bills are due.
  • When a bill arrives (e.g., annual property tax or insurance renewal), the servicer pays it from escrow.

Example: If annual taxes are $2,400 and insurance is $1,200, the servicer estimates monthly escrow needs of $300 for taxes and $100 for insurance — $400 total added to the principal-and-interest payment.

Annual escrow analysis, shortages, and surpluses

  • Lenders must perform an annual escrow analysis and provide a statement showing expected costs, payments, and any projected shortage or surplus (RESPA/Regulation X; see CFPB guidance).
  • Shortage: If past deposits weren’t enough, the servicer can ask for a lump-sum payment or spread the shortage over up to 12 months (or follow the contract terms).
  • Surplus: If your escrow balance is more than needed — typically more than $50 — the servicer must refund the excess or apply it to future payments within 30 days (CFPB).
  • Cushion: Federal regulations generally limit the escrow cushion to two months’ worth of payments collected in advance.

See FinHelp’s deeper dive on what triggers escrow analyses: What Triggers Mortgage Escrow Analyses and How to Respond.

Why your mortgage payment can change

  1. Property tax increases after a reassessment or levy.
  2. Higher homeowners insurance premiums or changes in coverage.
  3. An escrow shortage discovered in the annual analysis.
  4. Changes required by loan servicers or investor rules (for example, when servicing transfers).

Real example (rounded): If your servicer projects next year’s escrow need will rise by $600, they may spread that over 12 months, increasing your monthly mortgage payment by $50.

For more on identifying and fixing escrow shortfalls, see: Understanding Mortgage Escrow Shortages and How to Fix Them.

Who this affects

  • Most homeowners with amortizing mortgage loans (many borrowers with FHA or portfolio loans have mandatory escrows).
  • Borrowers who refinance, change insurance companies, or face property tax reassessments.
  • Borrowers seeking escrow waivers: some lenders and loan types permit waivers if you meet credit and equity thresholds, but approval is not guaranteed.

(HUD/FHA publishes requirements for federal mortgage programs; check program rules if you have an FHA loan.)

Common mistakes and misconceptions

  • Treating escrow like a savings account: You don’t earn interest (unless state law or your lender provides it) and funds are earmarked for specific bills.
  • Assuming monthly mortgage payments are fixed: Escrow-driven adjustments are common and explained in annual statements.
  • Ignoring the annual escrow analysis or not reviewing quoted insurance and tax amounts.

Practical tips to manage escrow-driven payment changes

  • Review your annual escrow statement as soon as you receive it.
  • Ask your servicer for the math behind projected tax and insurance amounts.
  • If you face a shortage, compare options: pay the lump sum (often lowest long-term cost) or accept the spread over 12 months.
  • Shop insurance proactively — lower premiums can reduce future escrow needs.
  • If you believe a tax assessment is wrong, appeal the assessment with your local assessor; successful appeals reduce future escrow charges.

Quick FAQ

  • Can my lender raise my monthly payment because of escrow? Yes — if taxes, insurance, or projected escrow needs increase and the annual escrow analysis shows a shortage or higher projected costs. (CFPB)
  • Can I cancel an escrow account? Some borrowers can request an escrow waiver if the lender and investor allow it and you meet eligibility rules. For many government-backed loans (FHA), escrow accounts are required.

Authoritative sources

  • Consumer Financial Protection Bureau (CFPB) — guidance on escrow accounts and RESPA/Regulation X.
  • U.S. Department of Housing and Urban Development (HUD/FHA) — program-specific escrow requirements.
  • IRS — tax timelines and deadlines for property-related deductions and payments.

Professional disclaimer

This article is educational and does not constitute financial, tax, or legal advice. Contact your mortgage servicer, tax assessor, or a licensed financial professional for guidance tailored to your situation.