What Is an Escrow Account for a Mortgage? How It Works

When you have a mortgage, your monthly payment likely includes more than just principal and interest. An escrow account automatically handles property taxes and homeowner's insurance — but many homeowners don't understand how it affects their payment.

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 escrow. When your property taxes or homeowner's insurance premium comes due, your servicer pays those bills directly from the escrow account.

How Escrow Payments Are Calculated

Your servicer estimates annual property taxes and insurance premiums, divides by 12, and adds that amount to your monthly payment. They're required to maintain a small cushion (typically 2 months of projected payments) in the account.

Why Your Mortgage Payment Changes

Your principal and interest payment is fixed (on a fixed-rate mortgage), but your escrow payment adjusts annually. If property taxes increase or your insurance premium goes up, your total monthly payment increases. Your servicer sends an escrow analysis statement each year explaining any changes.

Escrow Shortage vs Surplus

• Shortage: Your account didn't have enough to cover bills. You can pay the shortfall in one lump sum, or have it spread over 12 months in a higher payment.
• Surplus: Your account had more than needed. Surpluses over $50 are typically refunded to you automatically.

Can You Opt Out of Escrow?

Some lenders allow waiving escrow if you have 20%+ equity and a strong payment history, often for a small fee. This means you're responsible for paying property taxes and insurance yourself — which requires discipline to set the money aside.