An escrow account holds money for your property taxes and insurance
An escrow account is a separate account your mortgage lender sets up and controls. Each month, you pay a portion of your property taxes and homeowners insurance along with your mortgage payment. The lender deposits that portion into escrow, then pays your tax bill and insurance premium directly from that account when they come due. You never write those checks yourself—the lender does it for you.
This is different from the escrow that happens at closing (when a neutral third party holds the down payment until the sale completes). A mortgage escrow account exists for the life of your loan and handles two specific bills: property taxes and homeowners insurance. Some loans also include mortgage insurance premiums in escrow if you put down less than 20 percent.
The lender requires this arrangement because property taxes and insurance protect the lender's collateral—the house itself. If you stopped paying taxes, the county could foreclose. If the house burned down uninsured, the lender would lose its security. By controlling escrow, the lender ensures these bills get paid, whether you remember to pay them or not.
Key Takeaways
- Your lender collects a portion of property taxes and homeowners insurance with your monthly mortgage payment and holds it in escrow.
- The lender pays your tax and insurance bills directly from escrow when they come due, so you do not receive bills for these items.
- Your escrow payment changes when tax assessments or insurance premiums change, which can raise or lower your total monthly mortgage payment.
- You can request an escrow analysis from your lender once per year to review the account balance and verify the calculation is correct.
- Some lenders allow you to remove escrow once you have built enough equity and meet their requirements, though this is uncommon and puts the burden of paying taxes and insurance back on you.
How the lender calculates your monthly escrow payment
The lender estimates your annual property taxes and insurance costs, divides by 12, and adds that amount to your monthly mortgage payment. For example, if your property taxes are $2,400 per year and insurance is $1,200 per year, the lender adds $300 per month to your payment ($3,600 ÷ 12).
The lender does not know your exact tax bill or insurance cost at closing, so it makes an estimate based on the home's assessed value, the county's tax rate, and the insurance quote. Once the actual bills arrive, the lender adjusts the escrow payment up or down. This adjustment usually happens once per year, often in the fall or winter when new tax assessments come out.
If the escrow account runs short—because taxes or insurance rose faster than expected—your monthly payment goes up. If the account has a surplus—because you overpaid—the lender either refunds the difference or credits it against future payments. Lenders are required to send you an escrow analysis statement at least once per year showing the account balance, the bills paid, and the new monthly payment amount.
What happens when taxes or insurance costs change
Property tax assessments can jump when you buy a home, when the county reassesses the neighborhood, or when you make major improvements. Insurance premiums rise when claims increase in your area, when your insurer raises rates, or when you add coverage. Either change triggers an escrow adjustment.
If your property taxes increase by $600 per year, your monthly escrow payment rises by $50. If your insurance premium drops by $300 per year, your payment drops by $25. These adjustments happen automatically—you do not choose them. The lender recalculates based on the new bills and sends you a notice of the new payment amount.
Some states cap how much a lender can charge for escrow cushion—a buffer the lender keeps in the account to cover unexpected increases. This cushion is typically one-sixth of the annual escrow payment (two months' worth), though it varies by state and lender. A few states do not allow a cushion at all.
Reviewing your escrow account and catching errors
Lenders make mistakes. They may use an outdated tax assessment, forget to pay a bill on time, or misapply a payment. You have the right to request an escrow analysis at any time, and lenders must provide one at least once per year without charge. The analysis shows every bill paid, every deposit made, and the current account balance.
Check the analysis against your own records. Verify that the property tax amount matches your county's bill and that the insurance premium matches your policy. If the lender paid a bill late, contact your tax assessor or insurance company to confirm no penalties were added. If you find an error, write to the lender's escrow department with copies of the correct bills and ask for a correction.
If the lender overpaid into escrow or collected too much, you can request a refund. Most lenders will refund a surplus over a certain amount (often $50 or more) within 30 days of the escrow analysis. Some lenders credit the surplus to your next payment instead. Ask your lender what its policy is.
When you can remove escrow from your mortgage
Once you have built significant equity in the home—usually 20 percent or more—and your loan is in good standing, some lenders allow you to remove escrow. This means you pay your property taxes and insurance directly to the county and insurance company, and your mortgage payment drops by the escrow amount.
Removing escrow is uncommon and not all lenders offer it. Those that do often charge a fee ($250 to $500 is typical) and require you to prove you can manage these bills on your own. You also lose the lender's reminder system—if you forget to pay taxes or insurance, the consequences are yours alone. A tax lien or a lapsed insurance policy can lead to foreclosure.
Most borrowers keep escrow because it simplifies budgeting and removes the risk of missing a payment. The cost of escrow is built into your mortgage payment, so removing it saves money only if you invest the difference wisely. For most people, the peace of mind is worth the small cost.
Escrow disputes and what to do if something goes wrong
If your lender fails to pay a tax bill or insurance premium on time, you may receive a notice from the county or insurance company. Contact your lender immediately and ask for proof of payment. If the lender did not pay, demand that it do so at once and ask whether it will cover any penalties or interest that accrued.
If your insurance lapses because the lender did not pay the premium, your home is uninsured. Contact your insurance company to reinstate the policy and ask the lender to reimburse any reinstatement fees. If the lender refuses to pay or disputes the error, file a complaint with your state's banking regulator or the Consumer Financial Protection Bureau (CFPB).
If you believe the escrow calculation is wrong and the lender refuses to correct it after you provide evidence, you can dispute the charge with the lender in writing. Keep copies of all correspondence. If the lender does not resolve the dispute within a reasonable time, contact your state's attorney general or the CFPB.
Frequently Asked Questions
Can I pay my property taxes and insurance myself instead of through escrow?
Most lenders require escrow for the life of the loan, especially if you put down less than 20 percent. Once you reach 20 percent equity and meet your lender's other requirements, you may request to remove escrow, but the lender can refuse. If escrow is removed, you become responsible for paying taxes and insurance on time.
What if my escrow account runs out of money?
If the account does not have enough to cover a bill when it comes due, the lender pays it from its own funds and then raises your monthly escrow payment to replenish the account. You will see this reflected in your next escrow analysis statement. The lender cannot let the account go negative because the bills must be paid.
Does escrow money earn interest?
No. Escrow accounts do not earn interest in most states. The money sits in a non-interest-bearing account held by the lender. A few states require lenders to pay interest on escrow balances, but the rate is typically very low. Check your loan documents or ask your lender whether your state requires interest.
What if I disagree with the escrow analysis?
Request a detailed breakdown showing every bill paid and every deposit made. Compare it to your own tax and insurance bills. If you find an error, send the lender a written dispute with copies of the correct bills. The lender must investigate and respond within a reasonable time. If you remain unsatisfied, contact your state's banking regulator.
Does my escrow payment change if I refinance?
Yes. When you refinance, the new lender recalculates escrow based on the current property tax assessment and insurance premium. Your new escrow payment may be higher or lower than before. The new lender will also conduct an escrow analysis and may refund any surplus from your old loan.