An escrow account is a common part of the mortgage experience — but most homeowners don’t realize they can (and should) be managing it actively. Whether you’re a new homeowner or have been paying your mortgage for years, understanding how your escrow account works can help you avoid surprises and better plan for yearly costs.
In this guide, we’ll explain what an escrow account does, what it covers, how to manage changes, and what to do if your balance is off.
What Is an Escrow Account?
An escrow account is a separate, lender-managed account used to pay property-related expenses — typically property taxes and homeowner’s insurance. Instead of paying these bills directly in large annual or semiannual lump sums, your lender divides the total expected cost into monthly amounts and collects it with your mortgage payment.
Each month:
You pay principal + interest + escrow
Your lender puts the escrow portion into a dedicated account
When bills are due, the lender pays them on your behalf
Escrow protects both you and the lender by ensuring these critical expenses are paid on time.
What Does Escrow Cover (and What It Doesn’t)
Covered by escrow (typically):
Property taxes
Homeowners insurance
Flood insurance (if required)
HOA dues (occasionally, depending on lender)
Not covered by escrow:
Utility bills
Personal property coverage
Home repairs or maintenance
Your lender will outline exactly what’s included in your escrow in your initial Loan Estimate and closing disclosures.
How Escrow Accounts Impact Your Monthly Payment
When calculating your monthly mortgage payment, it’s easy to focus solely on the loan amount and interest. But your escrow account plays a major role in determining your actual monthly cost of homeownership.
Each year, your lender estimates how much you’ll owe for property taxes and insurance. That total is divided into 12 monthly installments and added to your mortgage payment. If either of those expenses increases, so will your payment — even if your principal and interest stay the same.
Example:
Let’s say your property taxes increase by $600 this year. That’s $50 per month your lender needs to collect — and your monthly mortgage payment will go up accordingly.
Understanding this relationship is crucial to budgeting accurately. You can use our Loan Affordability Calculator to estimate your full monthly payment, including taxes and insurance, based on realistic assumptions for your area.
Understanding Escrow Shortages, Surpluses, and Adjustments
Because taxes and insurance premiums can change from year to year, your escrow account must be recalculated annually. Lenders perform an escrow analysis to compare projected costs with actual bills.
Escrow Shortage
Occurs when the lender pays out more than was collected. You’ll typically:
Owe the difference immediately or
Spread it over 12 months in higher payments
Escrow Surplus
If less was spent than expected, you may receive a refund — or it may be applied toward future bills.
Escrow Adjustment
Even without a shortage/surplus, your monthly escrow portion may increase or decrease based on updated tax or insurance costs.
How to Read and Respond to Your Escrow Statement
Each year, your lender must send you an escrow analysis statement. This document includes:
Projected vs. actual disbursements
Any shortage, surplus, or refund
Your new monthly escrow amount
Tips for managing your statement:
Compare it to tax and insurance bills directly
Contact your insurance provider if premiums jumped unexpectedly
Ask your lender if you have options for paying shortages in full vs. spread out
Avoiding Escrow Surprises
Even though your lender manages the escrow account, that doesn’t mean it’s on autopilot. Unexpected payment changes can happen when taxes or insurance premiums rise — but there are ways to reduce the shock.
Here’s how to take control and stay ahead:
Review your property tax assessment annually. If it seems unusually high, you may be able to appeal through your local tax assessor’s office.
Shop your homeowners insurance each year. Premiums can increase over time, so it’s smart to compare rates before your policy renews.
Check your escrow analysis statement. This annual document outlines payments, balances, and any projected changes to your monthly amount.
Keep an emergency fund for escrow shortages. Even a modest increase in taxes or insurance can lead to a sudden jump in your mortgage payment.
Set calendar reminders for insurance reviews. Reach out to your provider 60–90 days before renewal to review coverage and prevent rate creep.
Request quotes from multiple insurance carriers. Shopping around keeps your premiums competitive and helps stabilize your escrow balance.
Managing your escrow proactively doesn’t just help avoid surprises — it gives you peace of mind knowing you’re not leaving money on the table.
Can You Waive Escrow?
In some cases, you might be eligible to waive escrow — meaning you’ll pay taxes and insurance on your own. This often requires:
A down payment of 20% or more
A strong credit profile
Lender approval
Note: Some lenders charge an escrow waiver fee or a slightly higher rate.
Waiving escrow gives you more control — but also more responsibility. If you want to explore this option, check out our full breakdown in Escrow vs. Escrow Waiver.
What Happens If You Sell Your Home?
When you sell your home, your escrow account is closed as part of the mortgage payoff process. Any remaining balance in the account is typically refunded to you within a few weeks after closing.
However, timing is everything. If a tax or insurance payment was recently disbursed — or is due shortly after the sale — your final payoff amount may be adjusted accordingly. It’s a good idea to confirm with your lender:
Whether all disbursements are up to date
When and how your escrow refund will be issued
If any pending bills will be prorated in closing
Being aware of how escrow is handled at closing ensures you’re not caught off guard during the transition.
FAQ: Managing Escrow Accounts
Why did my escrow payment increase?
Property taxes and insurance premiums may have gone up, causing your lender to collect more each month. Review your escrow analysis to see what changed.
Can I pay my escrow shortage all at once?
Yes. Most lenders allow you to pay it in full or spread it out over 12 months. Paying in full prevents a higher monthly mortgage payment.
Do I get interest on the funds in my escrow account?
It depends on your state. Some states require lenders to pay interest on escrow balances — others don’t. Check your lender’s escrow disclosure for details.
What happens if my escrow account runs out?
Your lender will still pay your taxes or insurance, but you’ll be responsible for making up the difference, often with increased payments the following year.
Can I change my insurance if it's paid through escrow?
Yes — you can switch providers any time. Just notify your lender and ensure the new provider sends them the updated premium invoice.
Final Thoughts
Your escrow account plays a critical role in keeping your home protected and your mortgage in good standing. But that doesn’t mean it runs on autopilot. By staying informed, reviewing your annual statement, and planning ahead, you can avoid unexpected costs and maintain control over your mortgage-related expenses.
And if you’re still unsure whether escrow is working in your favor, or if a waiver might make sense in the future, check out our Knowledge Hub for additional guidance.
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