What Is Escrow Account?
A mortgage escrow (or impound) account is a fund a servicer maintains on a borrower's behalf, collecting a portion of property taxes and homeowners insurance with each monthly payment and paying those bills when due.
Escrow Account in plain English
An escrow account (also called an impound account) is a holding account your mortgage servicer keeps for you. Each month part of your payment goes into it, and the servicer pays your property taxes and homeowners insurance from it when they are due.
Once a year the servicer reviews the account against the coming year's bills and adjusts your monthly deposit, which is why a fixed-rate payment can still change.
Worked example
A fixed-rate payment that went up
Illustrative example - round numbers, not current market data. Calculated with Reaixo's calculator engines.
Assumptions
- Loan
- $320,000 fixed at 6.50%, 30 years
- Property tax
- $4,800 → $5,400 a year
- Homeowners insurance
- $1,500 → $2,100 a year
- Escrow shortage
- repaid over 12 months (one common option)
| Step | Calculation | Result |
|---|---|---|
| 1. Principal and interest (unchanged) | $320,000 at 6.50% | $2,022.62 |
| 2. Old monthly payment | $2,022.62 + ($4,800 + $1,500) ÷ 12 | $2,547.62 |
| 3. New escrow deposit | ($5,400 + $2,100) ÷ 12 | $625.00 |
| 4. Shortage from bills paid last year | ($5,400 − $4,800) + ($2,100 − $1,500) | $1,200 |
| 5. New payment while the shortage is repaid | $2,022.62 + $625.00 + $1,200 ÷ 12 | $2,747.62 |
Monthly payment: $2,547.62 → $2,747.62. Nothing about the loan changed. The payment rises by $200 because the escrow account must collect the higher bills going forward and make up last year's $1,200 shortfall. After the shortage is repaid it settles at $2,647.62.
What this calculation leaves out
- Servicers analyse escrow once a year; the exact shortage and cushion depend on the account history.
- Many servicers let you pay a shortage in one lump sum instead of spreading it.
Why it matters
It spreads large annual tax and insurance bills into smaller monthly amounts and protects the lender's collateral by ensuring taxes and insurance stay current — most lenders require it below 20% equity.
Federal rules limit the cushion a servicer can hold to one-sixth of the year's expected payments and require an annual analysis. A surplus above a small amount must be refunded; a shortage can be repaid over time.
What it means for you
How does it affect my budget?
Expect the monthly escrow deposit to change once a year.
What happens if something goes wrong?
If the servicer pays a bill late or incorrectly, contact it in writing; federal rules require servicers to pay escrowed bills on time.
Common mistakes
- Ignoring the annual escrow statement until the payment changes.
- Forgetting to send a new insurance policy to the servicer after switching insurers.
- Assuming a fixed-rate loan means a fixed total payment.
Compare and common questions
Escrow Account: frequently asked questions
Why does an escrow payment go up?
Because your property taxes or insurance premium increased, or the account came up short last year. The annual escrow analysis shows which.
Do I get money back if my escrow has a surplus?
Usually, yes. Under Regulation X a surplus of $50 or more found in the annual analysis must be refunded if your payments are current; smaller amounts may be credited.
Is an escrow account required?
It depends on the loan. Many lenders require one when you have less than 20% equity, and some government-backed loans require it; others let you pay taxes and insurance yourself.
Related Terms
Where it fits
- Buying a home, Ownership: before this, Home Equity; next, Property Tax.
More Financing Terms
Recommended next step
Work through the escrow analysis line by line.
Why did my mortgage payment increase? →Sources and review
- 12 CFR 1024.17 - Escrow accounts (Regulation X), Consumer Financial Protection Bureau. Supports: Annual escrow analysis, the cushion limit, surpluses and shortages.
- What is an escrow or impound account?, Consumer Financial Protection Bureau. Supports: What an escrow account is and what it pays.
Where this applies: United States. Federal disclosure and servicing rules (TILA/Regulation Z, RESPA/Regulation X) apply nationwide; loan-program rules come from Fannie Mae, Freddie Mac, FHA, VA, USDA or the lender.
Last reviewed: · Updated:
Examples use illustrative figures; rules of thumb are labelled as such. Rates, limits and program rules change - confirm current figures with your lender or a qualified professional.
This definition is provided for general educational purposes and is not financial, legal, tax, or real estate advice. Verify important decisions with appropriately qualified professionals.
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