A mortgage escrow account is money held by a lender or servicer to pay certain property expenses, commonly real estate taxes and homeowners insurance. A portion of the monthly mortgage payment goes into the account, and the servicer pays covered bills when due.
Escrow is separate from principal and interest
A fixed mortgage rate can keep principal and interest stable while the total monthly payment changes because taxes or insurance change. Review statements to separate the loan payment from escrow collection and any mortgage insurance.
Annual analysis
The servicer estimates upcoming bills and the amount needed in the account. If actual expenses or timing differ, the account may have a shortage or surplus under applicable rules. A shortage can increase the monthly amount, require a separate payment, or both depending on the notice and available options.
At closing
The Loan Estimate and Closing Disclosure may show prepaid taxes, insurance, interest, and an initial escrow deposit. These are different from lender origination charges. Ask what period each amount covers and when the first regular payment is due.
During servicing
- Review the annual escrow statement.
- Compare projected bills with actual tax and insurance notices.
- Report an insurance-company or tax-address change promptly.
- Keep proof of covered bills and servicer payments.
- Ask how a shortage or surplus will affect the payment.
If the loan allows escrow to be removed, self-paying taxes and insurance requires disciplined saving for large due dates. Compare any waiver fee and lender conditions with the value of controlling the money directly.
Escrow is a payment-management tool, not a guarantee that property costs stay level. Build room in the budget for annual changes even when the mortgage rate is fixed.