Escrow Account

An escrow account is a special holding account your mortgage servicer manages to pay your property taxes and homeowners insurance on your behalf — think of it as a forced savings account that keeps you from accidentally missing a tax or insurance payment.

How Escrow Works

Each month, your lender collects 1/12 of your annual property taxes and insurance premiums on top of your principal and interest payment. They hold that money in escrow and pay the bills when they come due — usually semi-annually for taxes and annually for insurance. Your mortgage servicer handles the timing so you don’t have to track due dates.

Most lenders require escrow if you put less than 20% down. With 20%+ down, you can often waive it, though some charge a 0.25% fee for the privilege.

Dollar Example

Your annual property tax is $4,800 and homeowners insurance is $1,800. Total: $6,600/year. Your lender collects $550/month into escrow ($6,600 / 12). They also require a cushion — typically two months’ worth, or $1,100 — funded at closing. So you’ll prepay about $1,100 in escrow at the closing table.

Watch Out

Escrow accounts get re-analyzed annually. If your property taxes or insurance go up (and they usually do), your monthly payment increases. A $600 property tax increase means your escrow payment rises $50/month. These adjustments surprise many homeowners who thought their mortgage payment was fixed.

If the escrow analysis reveals a shortage, the servicer might give you the option to pay the lump sum or spread it over 12 months. Spreading it out is easier on cash flow but means temporarily higher payments. Run your full housing cost through our mortgage calculator to plan ahead.

Frequently Asked Questions

Can I cancel my escrow account?

Maybe. After you hit 20% equity, many servicers allow escrow cancellation with a written request. Some charge a fee (typically 0.25% of the loan balance). You’ll then be responsible for paying taxes and insurance directly. It gives you more control over your cash, but one missed tax payment can result in a lien on your property. Know yourself before opting out. See our buying guide for more on managing homeownership costs.