Understanding Your Escrow Account
Your mortgage payment changed and the interest rate did not. This is almost always escrow — here is how it works.
Fact-checked and reviewed for financial accuracy by Priya Kannan, CFP®. Read our content review process.
An escrow or impound account is a holding account your servicer maintains to pay property taxes and homeowners insurance on your behalf. You pay one-twelfth of the annual total with each mortgage payment, and the servicer pays the bills when they come due.
Why your payment changed
Your principal and interest are fixed on a fixed-rate loan and never change. Everything else does. Payments move when property taxes are reassessed, when insurance premiums rise, when a special assessment appears on the tax bill, or when the required cushion is recalculated.
The annual escrow analysis
Once a year your servicer projects the coming year's tax and insurance costs, compares them to the balance in your account, and adjusts. Federal rules permit servicers to hold a cushion of up to two months of escrow payments.
| Result | What happens | Your options |
|---|---|---|
| Shortage | Account will fall below the required minimum | Pay the shortage in full, or spread it over 12 months |
| Surplus over $50 | Account holds more than allowed | Servicer refunds it, usually within 30 days |
| Surplus under $50 | Small excess | May be refunded or credited to the account |
| Deficiency | Account is already negative | Repay over a short period; payment rises |
The first year is the most volatile
New homeowners are frequently surprised in year two. If the property was assessed at the prior owner's value — or carried an exemption you do not qualify for, such as a homestead or senior exemption — the reassessment after the sale can raise taxes substantially, and your escrow will catch up all at once.
Can you waive escrow?
Sometimes. Many lenders allow an escrow waiver with at least 20 percent equity, occasionally for a small fee or slightly higher rate. Government-backed loans generally require escrow. Waiving means you must reserve for and pay the tax and insurance bills yourself — which suits disciplined savers and punishes everyone else, because a missed tax payment can lead to a lien.
What to check each year
- Read the escrow analysis statement rather than only noting the new payment
- Verify the tax figures against your assessment notice
- Confirm any exemptions you qualify for have been applied
- Shop your homeowners insurance — a lower premium reduces escrow directly
- If you disagree with an assessment, appeal it within your jurisdiction's window
Frequently asked questions
Why did my mortgage payment go up if I have a fixed rate?
Because taxes or insurance rose. Principal and interest are fixed; the escrow portion is not.
Can I pay my escrow shortage in one payment?
Yes, and it keeps your monthly payment lower than spreading it over twelve months. Servicers usually offer both options.
Do I get escrow money back when I sell?
Yes. Your servicer refunds the remaining balance after the loan is paid off, typically within a few weeks of closing.
Editorial note. This article is educational and is not financial, tax, or legal advice. Loan terms, rates, insurance costs, and tax rules vary by lender, state, and individual circumstance. Figures shown are illustrative. Confirm details with a licensed lender, tax professional, or attorney before making a decision.
