What Is Escrow?
A simple explanation of how escrow protects your taxes and insurance.
Overview
Escrow is a separate account your lender uses to collect and pay your property taxes and homeowners insurance. A portion of your monthly mortgage payment goes into this account, and the lender pays the bills on your behalf. This guide explains how escrow works, why it exists, and how it affects your payment.
What Escrow Covers
- Property taxes
- Homeowners insurance
- Mortgage insurance (if required)
- Flood insurance (if required)
How Escrow Works
- Your lender estimates yearly taxes and insurance
- That amount is divided into 12 monthly payments
- Each month, part of your mortgage payment goes into escrow
- The lender pays the bills when they come due
Why Lenders Use Escrow
- Ensures taxes are paid on time
- Ensures insurance never lapses
- Protects the home (their collateral)
- Simplifies budgeting for homeowners
Escrow Shortages and Surpluses
- Shortage: taxes or insurance increased → payment may adjust
- Surplus: you paid in more than needed → refund or credit
- Annual escrow analysis explains changes
Do You Have to Use Escrow?
- Required for most FHA and USDA loans
- Often required if your down payment is under 20%
- Some borrowers can waive escrow on conventional loans
- Waiving escrow may include a fee or rate adjustment
Next Steps
- Review your current escrow balance
- Check your annual escrow analysis
- Confirm your tax and insurance due dates
- Ask your lender about escrow requirements
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