What Is an Escrow Account and How Does It Work?
Most homeowners with a mortgage have an escrow account but don't fully understand it. Here's a clear explanation.
General information, not professional advice — see terms of use.
An escrow account is managed by your mortgage servicer to collect and pay your property taxes and homeowner's insurance.
How it works: Each month, your mortgage payment includes 1/12 of your annual property tax bill and 1/12 of your annual insurance premium. When taxes and insurance are due, your servicer pays them directly from the escrow account.
Why lenders require it: Property tax liens take priority over mortgage liens. If you don't pay taxes, the government can foreclose even if your mortgage is current. Escrow protects the lender's collateral.
Escrow analysis: Your servicer reviews the account annually. If there's a shortage (taxes or insurance went up), your monthly payment increases. A surplus of more than $50 results in a refund.
Can you opt out? Some lenders allow it with 20%+ equity and excellent payment history, but managing tax and insurance payments yourself requires discipline — missing a tax payment can result in penalties and a tax lien.
Follow-up questions
Why did my mortgage payment go up if my rate is fixed?
With a fixed-rate mortgage, principal and interest never change. However, property taxes and insurance (collected through escrow) can increase each year, raising your total monthly payment. A significant increase usually means your property was reassessed at higher value or your insurance premium increased.
What happens to my escrow account when I sell?
Any remaining escrow balance is refunded to you, typically within 20–30 days of the loan payoff. Make sure your servicer has your forwarding address.
How is the escrow amount calculated?
Your servicer estimates next year's taxes and insurance based on current bills, divides by 12, and adds that to your monthly payment. Most servicers also keep a 2-month cushion in the account as required by federal law. You'll receive an annual escrow analysis statement explaining any changes.
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This page is general information, not professional advice, and it may not reflect the latest rules where you live. For your own situation, talk to a qualified adviser. Spotted an error? Email per@upperia.se and we will fix it.