Overview

Escrow accounts (sometimes called impound or buffer accounts) are a standard part of many U.S. mortgage loans. Instead of leaving homeowners to save separately for yearly property taxes and insurance, lenders collect a portion of those costs with each monthly mortgage payment and pay the bills on the borrower’s behalf. This reduces the risk that taxes or insurance will go unpaid—which protects both the homeowner and the lender. (See CFPB guidance on mortgage escrow accounts: https://www.consumerfinance.gov)

How escrow accounts are funded and used

  • Monthly collection: Your monthly mortgage payment can include principal, interest, taxes, insurance, and any escrowed items. The escrow portion accumulates until the lender pays the county or insurer.
  • Disbursement timing: Lenders make payments to taxing authorities and insurers when amounts are due, not necessarily monthly. The lender’s servicing statement will list exact disbursement dates and amounts.
  • Annual escrow analysis: Federal rules require lenders to review (reconcile) escrow accounts at least once every 12 months. The analysis compares actual payments and projected costs, then adjusts your monthly escrow contribution if taxes or premiums have changed.

Key federal rules to know

  • RESPA and the CFPB: The Real Estate Settlement Procedures Act (RESPA) and CFPB rules require annual escrow analyses and limit how much cushion lenders can keep in an escrow account (typically up to two months’ worth of payments). For more detail, see the CFPB overview on escrow accounts: https://www.consumerfinance.gov/owning-a-home/payment-escrow-accounts/
  • Surplus refunds and shortages: If an annual analysis shows a surplus above the regulatory threshold, lenders must refund it to you (commonly when the surplus exceeds $50). If there’s a shortage, you’ll be notified of the amount and either be asked to pay it in a lump sum or have it amortized into higher monthly escrow payments.

Common situations and examples

  • Down payment and escrow requirement: Lenders often require escrow accounts for borrowers with down payments under 20% to protect their lien. This is common in conventional and government‑backed loans.
  • Sample math: If annual property tax is $3,600 and homeowner’s insurance is $1,200, your lender may collect $400 monthly into escrow ($4,800 ÷ 12) plus any allowed cushion.
  • Real client example: In my practice advising first‑time buyers, setting up escrow eased cash‑flow planning and prevented a missed tax payment that would have otherwise generated penalties.

How shortages and surpluses work

  • Shortages: Caused by rising taxes or insurance or under‑estimated prior balances. You can be asked to pay the shortage immediately or spread it across future payments.
  • Surpluses: If the account has more than the permitted surplus, you generally receive a refund. Ask your servicer for the annual statement and the reason for any refund or charge.

Options and tradeoffs

  • Waiving escrow: Some lenders allow an escrow waiver for borrowers with significant equity (often 20%+), but waivers usually come with fees or a higher interest rate. Compare costs before declining escrow.
  • Paying bills yourself: Managing taxes and insurance directly gives control but requires discipline to save the full amounts and meet due dates—missing payments risks liens, penalties, or lapsed insurance.

Practical tips

  1. Review your annual escrow statement carefully and compare it to local tax notices and insurance bills.
  2. Keep records of tax assessments and insurance renewals and provide copies to your servicer if there’s a discrepancy.
  3. If you disagree with your servicer’s escrow analysis, request documentation and escalate to the servicer’s escrow department; you may also file a complaint with the CFPB if unresolved (https://www.consumerfinance.gov/complaint/).
  4. Budget for possible increases—property taxes and insurance can change year to year.

Internal resources

FAQ (short)

  • Will my lender always set up an escrow account? Not always—requirements depend on the loan program and down payment amount, but many lenders require it for low‑equity loans.
  • When will I get a refund? If your escrow analysis shows a qualifying surplus, federal rules typically require a refund shortly after the analysis; check your annual statement for timing.

Professional disclaimer

This article is educational and not individualized financial or legal advice. For decisions about escrow, taxes, or your mortgage, consult a licensed mortgage professional or tax advisor.

Authoritative sources