Quick overview

An escrow account (sometimes called an escrow impound or trust account) is a mechanism lenders use to collect and hold money from borrowers so third‑party bills tied to the property—most frequently property taxes and homeowners insurance—are paid on schedule. This protects the lender’s collateral and simplifies budgeting for homeowners.

This article explains what mortgage escrow accounts typically cover, how monthly escrow amounts are calculated, what happens when balances are short or overfunded, and practical steps you can take to monitor and manage your account. It draws on Consumer Financial Protection Bureau guidance and industry practice as of 2025 (see sources at the end).

What escrow accounts commonly cover

  • Property taxes: The most common use. The lender estimates annual property taxes and collects a monthly portion to pay the tax bill when it’s due.
  • Homeowners (hazard) insurance: Lenders collect for your annual homeowner’s insurance premium so the policy doesn’t lapse.
  • Mortgage insurance (PMI): If your loan requires private mortgage insurance, some servicers collect PMI through escrow.
  • Flood insurance or other required hazard insurance: If your property sits in a flood zone or local rules require specific coverage, the premium may be escrowed.
  • HOA fees and special assessments (sometimes): Less common, but servicers occasionally collect HOA dues or local special assessment charges if required by the loan terms or local practice.

Note: The exact list depends on your loan documents and state/local rules. Federal guidance allows servicers to include certain items; check your mortgage agreement and annual escrow statement.

How lenders calculate your monthly escrow payment (simple breakdown)

The basic monthly escrow contribution equals: (Estimated annual tax + Estimated annual insurance + Required cushion + Any shortage) / 12

Key pieces:

  • Estimated annual tax and insurance: Lenders use the most recent bills or the taxing authority’s figures.
  • Cushion: Under federal rules implemented through RESPA, servicers are generally allowed to maintain a cushion up to two months’ worth of escrow payments to cover timing differences and small increases (see CFPB). That cushion prevents immediate shortages when bills move.
  • Shortage: If prior year bills were higher than expected, your account may show a shortage. Lenders will notify you and either require a lump‑sum payment or spread the shortage over the next 12 months (or a different schedule spelled out in your escrow disclosure).

Example: Annual property taxes $3,600 + homeowners insurance $1,200 = $4,800. A two‑month cushion (1/6 of annual total) = $800. If there is no shortage, monthly escrow = (4,800 + 800)/12 = $466.67.

Timing and statements you should expect

  • Initial escrow deposit at closing: Many lenders require an initial deposit into the escrow account at closing to ensure funds are available when the first bills come due.
  • Monthly collection: The escrow portion is collected with your monthly mortgage payment and held by the loan servicer.
  • Annual escrow analysis and statement: Federal rules require servicers to perform an annual escrow analysis and provide a statement explaining any changes, shortages, surpluses, or refunds.

If you don’t receive a clear annual escrow statement, request it from your servicer. The analysis explains how the servicer calculated the escrow requirement and any cushion.

What happens if there’s a shortage or surplus

  • Shortage: The servicer will notify you and typically offer two options: pay the shortage upfront or have it amortized into your monthly payment over 12 months (the notice will state which approaches are available). If the shortage exceeds regulatory limits, the servicer must follow specific disclosure rules when increasing payments.
  • Surplus: If your escrow balance exceeds allowed cushion amounts by a certain threshold, federal rules and many servicers require returning the excess to you. In practice, small surpluses may be applied to next year’s payments; larger amounts are often refunded.

For more detail on handling shortages, see our guide: Escrow Shortfalls: Why They Happen and How to Avoid Them.

Common scenarios and real‑world examples

  • New homeowner: At closing your lender estimated taxes and insurance and required an initial escrow deposit. Your first mortgage payment included the escrow portion, so when your insurance bill arrived at renewal the servicer paid it.
  • County tax increase: Your property tax assessment rose mid‑year. At the next escrow analysis, your servicer recalculated contributions, notified you of a higher monthly escrow portion, and explained any shortage or cushion used.

In my 15 years advising homeowners, the most frequent surprise is an underestimated property tax bill after a local reassessment. Proactive steps—reviewing county tax records and discussing potential reassessments with a tax professional—can reduce shocks.

Can you opt out of escrow?

Possibly, but it depends on the loan type, your equity, and lender policy:

  • Lenders commonly require escrow for FHA, VA, and other government‑backed loans.
  • Conventional lenders may allow an escrow waiver once you have sufficient equity (commonly 20%+), but policies vary and some lenders charge an annual fee to waive escrow.

Check your loan documents and ask your servicer about an escrow waiver. Our article on Escrow Waiver Conditions explains typical lender requirements.

Practical monitoring checklist (what to do as a homeowner)

  1. Keep copies of your annual escrow statement and compare year‑to‑year. Look for changes in projected taxes or insurance.
  2. Verify your insurer and tax authority contact information on the escrow statement; report errors immediately.
  3. If you change insurance carriers, notify your servicer with the policy effective date and premium to avoid temporary under‑ or overcollection.
  4. Watch for notices of tax reassessment from your county—these are often the largest drivers of escrow increases.
  5. If you have an escrow shortage notice, evaluate whether you can pay the lump sum to avoid higher monthly payments.
  6. Request an escrow account history if you suspect errors. Federal rules require servicers to respond to certain requests and correct mistakes.

Mortgage servicer errors and disputes

Servicers sometimes misapply payments, fail to pay bills on time, or use wrong billing amounts. If a tax or insurance payment is late because of servicer error, document dates and communications and file a dispute in writing. The Consumer Financial Protection Bureau (CFPB) has guidance on escrow accounts and mortgage servicing practices; you can file a complaint if your servicer doesn’t resolve the issue (see sources).

For how servicers typically manage payment allocation and reconciliations, see our related explainer: Understanding Mortgage Escrow Accounts and Payments.

Common misconceptions

  • “Escrow covers everything related to my home.” Not true. Escrow generally covers taxes and property insurance; utilities, maintenance, and many HOA charges are not automatically included unless specified.
  • “If my escrow balance grows, the lender is profiting.” Lenders are allowed a small cushion to prevent shortages; large, unexplained overcollections should prompt a review and potential refund.

FAQs (short answers)

  • Will escrow protect my credit? Yes — timely payment of taxes and insurance prevents liens or policy lapses that can harm your credit or lead to forced-placed insurance (which is more expensive).
  • How soon can I get a refund if there’s a surplus? The servicer must follow disclosure rules; typically refunds are issued after the annual escrow analysis if the surplus exceeds allowable limits.
  • Who enforces escrow rules? Federal rules implemented under RESPA and enforced by agencies like the CFPB set servicer obligations; state laws may add protections.

Professional tips

  • At closing, ask for the escrow worksheet showing how the servicer calculated the initial escrow deposit.
  • Keep a calendar reminder for your annual escrow statement to review expected changes.
  • If you anticipate a big tax reassessment or insurance change, tell your servicer early so they can adjust the estimate and avoid large future shortages.

In my practice, borrowers who track assessments and proactively communicate with servicers avoid the largest rushes of unexpected increases.

Sources and further reading

Professional disclaimer: This content is educational and not a substitute for personalized legal, tax, or mortgage advice. For decisions about your specific loan, contact your mortgage servicer and a qualified financial advisor or attorney.