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An escrow account is set up by your mortgage lender to pay your property taxes and homeowners insurance out of a portion of each monthly payment; the mortgage servicer holds the money and pays the bills when they come due. Because taxes and premiums change from year to year, the escrow part of the payment changes too, and once a year the servicer sends a statement showing what it collected, what it paid, and whether the account came up short.
How does an escrow account work?
The Consumer Financial Protection Bureau's page on what an escrow or impound account is says the account is set up by the lender to pay certain property-related expenses, mainly property taxes and homeowners insurance premiums; the money comes from a portion of the monthly mortgage payment, and the servicer manages the account and pays those bills on your behalf. The CFPB adds that many lenders require an escrow account, that it is sometimes required by law, and that even where it is not required it is worth considering voluntarily.
- You payOne monthly amount that combines principal, interest, and the escrow portion
- The servicer holdsThe escrow portion accumulates in the account through the year
- The bills arriveThe county sends the tax bill and the insurer sends the premium notice to the servicer
- The servicer paysEach bill is paid from the account when due
- The account is analyzedOnce a year the servicer compares what it collected to what it paid and resets the escrow portion
The escrow portion is a forecast: the servicer estimates next year's bills and divides the total into monthly pieces. When the forecast is wrong, the annual analysis corrects it and the payment moves.
Why did the mortgage payment change?
The CFPB's page on why a monthly mortgage payment goes up or changes lists the common causes, and the first is that property taxes or homeowners insurance premiums changed, which moves the escrow portion. The others are an adjustable interest rate resetting, private mortgage insurance changing or ending, a temporary buydown ending, or new servicer fees. If the change looks wrong, the CFPB says to contact the servicer, note a reference number and the name of the person you spoke with, and if that fails, send a notice of error to the servicer's designated address.
| Cause | Where it shows | What to check |
|---|---|---|
| Property tax bill changed | Annual escrow statement | The assessor's notice for the new assessed value and any lost exemption |
| Insurance premium changed | Annual escrow statement | The renewal declarations page from the insurer |
| Escrow shortage being repaid | Annual escrow statement | The shortage line and the repayment period |
| Adjustable rate reset | Rate change notice | The loan note for the index, margin, and caps |
| Mortgage insurance changed or ended | Payment change notice | The loan documents for when PMI drops off |
| Temporary buydown ended | Payment change notice | The buydown agreement from closing |
| New servicer fee | Monthly statement | The fee description; ask the servicer to explain it |
Read the annual escrow statement line by line before calling anyone. In most cases the change is a tax or insurance bill you can verify against a document you already have, and the call is only needed when the numbers do not match.
What is an escrow shortage, and how is it repaid?
A shortage is the amount by which the escrow balance falls short of the target balance at the time of the annual analysis. The CFPB's mortgage servicing FAQs set out the servicer's options: for a shortage of less than one month's escrow payment, the servicer may do nothing, require repayment within 30 days, or spread it in equal monthly payments over at least 12 months; for a shortage of one month's payment or more, the servicer may do nothing or spread it over at least 12 months.
A shortage happens when the bills came in higher than the servicer forecast. A surplus is the reverse, a balance above the target. The same FAQs say the annual escrow statement must be sent within 30 days of the end of the escrow account computation year.
Per the CFPB's mortgage servicing FAQs, a shortage of one month's escrow payment or more is either absorbed or spread in equal monthly payments over at least 12 months.
A shortage lands twice. The new escrow portion goes up to match the higher bills, and the repayment of last year's shortfall is added on top of it for the repayment period. Owners who see a large jump should separate the two on the statement: the first part is permanent, the second ends when the shortage is repaid.
In new-construction neighborhoods, the first tax bill after closing is often based on the lot as it was assessed before the house was finished. The next bill reflects the finished house, and the escrow analysis catches the whole difference in one step. Owners who did not expect it call it an error; it is usually the assessment catching up.
How do property taxes get set?
Property tax is set by the local taxing authorities, usually the county, the city, and the school district, by applying their rates to the assessed value the assessor puts on the property. The assessed value, the exemptions you qualify for, and the rates each change on their own schedule, and each has its own notice and its own deadline to question it. The assessor's website for your county is the source for all three.
- The assessment notice arrives before the bill and gives the assessed value and the window to appeal it. Read it when it comes; the appeal deadline is usually short and passes before the bill does.
- Exemptions vary by state and often have to be applied for (a primary residence exemption is the common one). A lost or never-filed exemption is a frequent cause of a bill that jumps.
- Improvements can change the assessment. Adding a pool, an addition, or a finished basement shows up in the permit record, and many assessors read permit records. Plan for the tax change when you plan the renovation.
Put the assessment notice and the tax bill on the calendar for the months they arrive in your county, and read both against last year's. The record of what the house was assessed at, year by year, is the evidence for an appeal, and it only exists if you kept the notices.
Should you escrow if you do not have to?
If the loan allows you to waive escrow, the trade is control against risk: you keep the money and earn whatever it earns until the bills are due, and you take on the job of paying two large bills on time every year without a reminder from anyone. The CFPB's suggestion to consider an account voluntarily reflects how often that second part goes wrong. An unpaid tax bill can lead to a lien on the property, and an unpaid premium can leave the house uninsured; both are worse than the return on the money.
Owners who waive escrow should treat the tax bill and the premium as fixed lines in the maintenance budget, saved monthly and paid from a separate account. Owners who keep escrow still need the budget; the escrow portion is the one line in it that changes without asking.
What should you keep in the record?
Keep the annual escrow statement, every tax bill and assessment notice, the insurance declarations page for each policy year, and the Closing Disclosure from the purchase, which is where the initial escrow deposit and the first year's estimates were set. Together they explain every change in the payment and give you the history an appeal, a refinance, or a sale will ask for. The closing-day documents post covers where the Closing Disclosure and the first policy come from.
In Property Station these go on the Documents page: the tax bill and assessment notice under the Document Type "Tax," the declarations page under "Insurance" with the policy's expiry date so it shows up before renewal, and the Closing Disclosure under "Closing." The escrow statement fits under "Other" with the year in the title.
HOA dues are not escrowed and are easy to forget in the month a shortage repayment starts; the HOA post covers how assessments are set and what to file.
Common questions
Why is my escrow payment higher than my neighbor's?
Escrow collects for your tax bill and your insurance premium, and both are specific to your house. A different assessed value, a different exemption, a different insurer, or a different closing date (which changes how much the account had to collect up front) all change the number. Compare the annual escrow statements, not the payments.
Can I pay the taxes and insurance myself instead?
Sometimes. The CFPB notes that many lenders require an escrow account and that it is sometimes required by law, so the answer is in your loan documents and your servicer's policy. If you are allowed to waive it, you take on two large bills a year and the job of never missing them.
What happens if the servicer does not pay the tax bill?
Contact the servicer at once, note the reference number and the name of the person you spoke with, and send a notice of error to the servicer's designated address with a copy of the bill. Contact the tax authority as well so the bill does not go to lien while the dispute runs.
Do HOA dues go through escrow?
No. The escrow account pays property taxes and homeowners insurance premiums, and the association bills you directly. Budget for dues as a separate monthly line, and read the declaration for what the association can do about a late payment.
What should you do next?
Find the most recent annual escrow statement and read the shortage line and the new monthly amount against the tax bill and the insurance renewal. If they match, file all three; if they do not, call the servicer with the statement in front of you. Then put next year's assessment notice on the calendar for the month it arrives.