Managing Your Escrow Account: Tips for Homeowners

What Is a Mortgage Escrow Account?

A mortgage escrow account (also called an impound account in some regions) is a special holding account managed by your mortgage servicer to collect and pay property taxes and homeowner's insurance on your behalf. Each month, a portion of your mortgage payment is deposited into this account, and when tax and insurance bills come due, your servicer pays them automatically.

While escrow accounts provide convenience and protection for both you and your lender, they require some understanding to manage effectively. This guide explains how escrow accounts work, what to expect from annual analyses, how to handle shortages and surpluses, and tips for keeping your account on track.

How Mortgage Escrow Accounts Work

Setting Up the Account

Escrow accounts are typically established at closing. You'll make an initial deposit (often 2-3 months of estimated taxes and insurance) to create a cushion in the account. This initial funding is part of your closing costs. For a complete breakdown, see Closing Costs Explained.

Monthly Contributions

Your monthly mortgage payment consists of four components, often called PITI:

• Principal: Pays down your loan balance
• Interest: Your cost of borrowing
• Taxes: Property taxes deposited into escrow
• Insurance: Homeowner's insurance deposited into escrow

The escrow portion (taxes and insurance) is calculated by dividing your estimated annual costs by 12. This amount is added to your principal and interest payment.

Paying Bills from Escrow

When property tax or insurance bills come due, your servicer pays them directly from your escrow account. You don't need to take any action—the bills are paid automatically before they become delinquent.

The Annual Escrow Analysis

Each year, your mortgage servicer performs an escrow analysis to compare your actual tax and insurance costs against what was collected. This analysis determines whether your monthly escrow payment needs adjustment.

What the Analysis Reviews

• Actual taxes and insurance paid during the year
• Expected taxes and insurance for the coming year
• Current account balance
• Required minimum balance (cushion)

Possible Outcomes

Account Is on Track

If your escrow collections closely matched actual expenses, your payment may stay the same or change minimally.

Escrow Shortage

If your taxes or insurance increased more than anticipated, your account may not have enough to cover upcoming bills. This creates a shortage that must be addressed.

Escrow Surplus

If you overpaid into escrow (perhaps taxes decreased), you may have excess funds. Federal law requires servicers to return surpluses over $50 to you.

Understanding and Handling Escrow Shortages

Escrow shortages are common, especially as property values and taxes increase over time.

Why Shortages Occur

• Property taxes increased due to reassessment or rate changes
• Homeowner's insurance premiums increased
• Initial escrow estimates were too low
• Your home value increased, raising insurance replacement costs

Your Options

When you receive a shortage notice, you typically have options:

• Pay the shortage in full: Make a one-time payment to bring the account current, keeping your monthly payment lower
• Spread the shortage: Most servicers allow you to pay the shortage over 12 months, added to your regular payment
• Combination: Pay part of the shortage now and spread the rest

Additionally, your monthly escrow payment will likely increase going forward to reflect higher expected costs.

Understanding Escrow Surpluses

Surpluses occur when more money was collected than needed.

Why Surpluses Occur

• Property taxes decreased
• You shopped for cheaper insurance
• Initial estimates were too high

What Happens with Surplus Funds

Federal law (RESPA) requires servicers to refund surplus amounts over $50 within 30 days of the escrow analysis. Smaller surpluses may be credited to your account to reduce future payments.

Reading Your Escrow Statement

Your annual escrow analysis statement contains important information. Key sections include:

Account History

Shows all deposits into and payments from your escrow account during the year.

Projected Activity

Estimates expected deposits and disbursements for the coming year.

Account Balance Projection

Shows the projected balance at each month's end to ensure adequate funds are available when bills are due.

New Payment Amount

If your escrow payment is changing, the new total monthly payment will be clearly stated along with the effective date.

Tips for Managing Your Escrow Account

Review Statements Carefully

When you receive your annual escrow analysis, review it for accuracy. Verify that tax and insurance amounts match actual bills. Errors happen, and catching them early prevents problems.

Monitor Tax Assessments

Be aware of your property tax assessment. If your assessment increases significantly, your escrow payment will follow. If you believe your assessment is too high, consider appealing. Learn more in Property Tax Basics for Homeowners.

Shop Your Insurance

Periodically compare homeowner's insurance rates. If you switch to a lower-cost policy, notify your servicer so they can update escrow calculations.

Report Issues Promptly

If you notice errors on your escrow statement, contact your servicer immediately. Common issues include:

• Incorrect tax or insurance amounts
• Bills paid to wrong entities
• Missed payments
• Incorrect account calculations

Plan for Payment Changes

Expect your mortgage payment to change periodically due to escrow adjustments. Budget accordingly, especially if you know taxes or insurance are increasing.

Keep Good Records

Save property tax bills, insurance declarations, and escrow statements. These help verify servicer calculations and resolve disputes if they arise.

Can You Avoid Having an Escrow Account?

Some borrowers prefer to pay taxes and insurance directly rather than through escrow.

Lender Requirements

Many lenders require escrow accounts, especially for:

• Loans with less than 20% down payment
• FHA and VA loans (escrow is required)
• Loans considered higher risk

Waiving Escrow

Some lenders allow escrow waivers for qualified borrowers, though they may charge a fee or slightly higher interest rate. If you waive escrow, you're responsible for paying taxes and insurance on time—failure to do so can result in your lender establishing an escrow account and forcing you into it.

Pros and Cons of Self-Managing

Pros:

• Control over your own money
• Potential to earn interest on funds until bills are due
• Flexibility in timing of payments

Cons:

• Responsibility to ensure bills are paid on time
• Risk of penalties for late payment
• Need to budget and save for large lump-sum payments

Escrow and Refinancing

When you refinance your mortgage, your existing escrow account is typically closed and a new one established. You'll receive a refund of the balance in your old account (usually within 30 days of closing), and you'll fund a new escrow account at the new loan's closing.

For more about refinancing, see Refinancing Your Home: Do You Need New Title Insurance?

The Bottom Line

Escrow accounts simplify homeownership by ensuring property taxes and insurance are paid on time. While they remove some control over your funds, they provide valuable protection against missed payments that could result in penalties, liens, or insurance lapses.

Stay engaged with your escrow account—review annual statements, monitor for changes in taxes and insurance, and address any issues promptly. With proper attention, your escrow account will work smoothly throughout your homeownership journey.