Overview

Escrow accounts (also called impound accounts) are built into many mortgage payments so recurring property expenses—most commonly property taxes and homeowners insurance—get paid on time. Lenders use escrow accounts to reduce the risk of missed payments that could lead to tax liens or uninsured losses, while borrowers gain predictable monthly costs and fewer large, unexpected bills (Consumer Financial Protection Bureau).

In my 15 years helping buyers close and manage mortgages, I’ve seen escrow accounts prevent costly gaps in coverage and late tax notices—especially for first‑time buyers or owners with variable tax assessments.

How escrow accounts work

  • Each month a portion of your mortgage payment is set aside into the escrow account for taxes and insurance. When bills are due, the loan servicer pays them directly to the taxing authority or insurer.
  • Lenders/servicers perform an annual escrow analysis to reconcile actual bills with the money collected; they then notify you if your monthly escrow contribution will change (RESPA/CFPB guidance).
  • Many servicers keep a cushion (commonly up to two months’ worth of payments) to smooth timing differences between collection and disbursement.

(For a deeper walkthrough of servicing and monitoring, see Mortgage Servicing Escrows: How Escrow Accounts Work and How to Monitor Them: https://finhelp.io/glossary/mortgage-servicing-escrows-how-escrow-accounts-work-and-how-to-monitor-them/)

Who typically must use an escrow account

  • Government‑backed loans (FHA and VA) commonly require escrows. Conventional lenders may require escrows if you have a low down payment or limited equity, though some lenders offer escrow waivers for qualified borrowers.
  • Whether you can waive escrow depends on lender policy and state laws. If a waiver is allowed, it often comes with a higher interest rate or fee (see Understanding Escrow Waivers: Savings and Risks for Mortgages: https://finhelp.io/glossary/understanding-escrow-waivers-savings-and-risks-for-mortgages/).

Shortages, surpluses, and your rights

  • After the annual escrow analysis, if the account shows a shortage you may be asked to make up the shortfall immediately or have it spread over the next 12 months.
  • If the analysis shows an overage (surplus) above a threshold (commonly more than $50), federal servicing rules generally require the servicer to refund the excess or apply it to the next year’s escrow payments (CFPB).
  • If your monthly payment changes because of tax increases or higher insurance premiums, the servicer must send a notice explaining the change.

(For examples of how escrow adjustments affect monthly payments, see Escrow and Impound Accounts: How They Affect Loan Payments: https://finhelp.io/glossary/escrow-and-impound-accounts-how-they-affect-loan-payments/)

Taxes and deductibility

  • Paying property taxes or insurance through an escrow account does not change your tax treatment. If you itemize, property taxes are generally deductible subject to federal limits (see IRS Publication 530 and IRS guidance on deductible taxes: https://www.irs.gov/publications/p530).
  • The escrow account is simply a payment mechanism; always keep documentation (annual escrow statements and tax bills) for tax reporting.

Pros and cons—quick summary

Pros:

  • Predictable monthly budgeting
  • Reduces risk of missed tax or insurance payments
  • Protects lenders and maintains mandatory coverage in many loan programs

Cons:

  • Less control over timing of payments
  • Some borrowers prefer to earn interest on funds themselves (not possible when funds are held by servicers)
  • You may face temporary increases in monthly payments after escrow analyses

Practical tips

  • Review your annual escrow statement carefully and compare it to tax and insurance bills.
  • If you get a new insurance policy or a tax revaluation, notify your servicer so they can update the escrow calculation.
  • Keep records of your payments and escrow statements; if you disagree with an escrow analysis contact your servicer in writing and ask for documentation.

Common questions

  • Can I pay property taxes myself instead of using escrow? Possibly—if your lender permits an escrow waiver. But loans insured or guaranteed by FHA/VA often require escrow.
  • Will my escrow account earn interest? Rules vary by state and servicer; some states require interest on escrow balances, others do not.

Sources and further reading

Professional disclaimer: This article is for educational purposes only and does not constitute tax, legal, or financial advice. For personalized guidance, consult a qualified tax advisor, real estate attorney, or mortgage professional.