Homebuying
Mortgage Escrow Accounts Explained: Taxes, Insurance & Monthly Payments
5 min read · 2025-12-22
Your lender probably collects more than just principal and interest each month. Here's how escrow accounts work.
If you have a mortgage with less than 20% down, your lender almost certainly requires an escrow account. Even with 20% down, many borrowers choose to keep escrow for convenience. Understanding how it works prevents billing surprises.
What Is an Escrow Account?
An escrow account is a holding account managed by your mortgage servicer. Each month, a portion of your mortgage payment goes into this account. The servicer then pays your property taxes and homeowners insurance directly from the escrow account when they come due — so you don't have to manage those large lump-sum payments yourself.
How Your Escrow Payment Is Calculated
Your lender estimates your annual property tax and insurance costs, divides by 12, and adds that to your monthly payment. Plus, lenders keep a 2-month cushion in escrow as required by RESPA. Example: $4,200 annual property taxes + $1,800 annual insurance = $6,000 / 12 = $500/month for escrow.
Escrow Analysis and Adjustments
Your servicer reviews your escrow account at least annually. If taxes or insurance increased, your monthly payment increases too. If the account has a surplus above the required cushion, you'll receive a refund. This is why your mortgage payment can change even on a fixed-rate loan.
When your property tax assessment goes up significantly, expect an escrow shortage notice. You can pay it in a lump sum or spread it over 12 months — ask your servicer for the option.
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