In mortgage terms, "escrow" refers to an account your lender manages to collect and pay property taxes and homeowner's insurance on your behalf. A portion of each monthly payment goes into this account, and the lender makes the annual or semi-annual payments when they're due.
(Escrow also refers to a separate process during the home purchase itself — the period between an accepted offer and closing, during which a neutral third party holds the deposit. This article covers the ongoing mortgage escrow account.)
Why Lenders Require Escrow
Lenders require escrow because they need to protect their collateral. If property taxes go unpaid, the government can place a tax lien that supersedes the mortgage. If insurance lapses and the home burns down, the lender loses their security. Escrow ensures these bills get paid, reliably, every year.
Some loan types (VA, conventional with 20%+ down) may allow you to waive escrow, but lenders often charge a fee for this privilege and may require a strong credit profile.
How the Monthly Amount Is Calculated
Your lender estimates your annual property taxes and insurance premium, divides by 12, and adds that amount to your monthly payment. They also maintain a cushion — typically 2 months of reserves — to cover timing differences.
Example: $4,800/year in property taxes + $1,200/year in insurance = $6,000/year = $500/month. Plus a 2-month cushion of ~$1,000 collected at closing. Your total monthly PITI would be P&I + $500.
The Annual Escrow Analysis
Once a year, your lender sends an escrow analysis. This compares:
- What was actually paid out of escrow
- What was collected from you
- The current balance vs. required cushion
If taxes or insurance went up, your escrow payment increases and you may owe a shortage amount. If you overpaid, you get a refund check. The analysis is required by law and must be provided within 30 days of the analysis date.
Common Escrow Surprises
- Property tax reassessment after purchase — if you bought for more than the assessed value, a reassessment can spike taxes in year 2. Your escrow payment will increase.
- Insurance premium increases — home insurance has risen sharply in recent years in many states. Your lender will adjust escrow accordingly at the annual analysis.
- New construction — taxes on a new build may be estimated based on land value only during the first year, then jump significantly when the structure is assessed.
Waiving Escrow
If you have 20%+ equity (or put 20%+ down) and a strong credit score, some conventional lenders will let you manage your own taxes and insurance — known as "waiving escrow." You'll need to budget carefully and pay your own tax and insurance bills when due. Some lenders charge a small fee (~0.25% of the loan amount) for this option.