What Is an Escrow Account in a Mortgage Loan Transaction?

By Wayne Wallace, SVP Mortgage Solutions | Homewood Mortgage, LLC | NMLS #745186

When you buy a home with mortgage financing, your monthly payment may include more than just principal and interest. In many cases, part of your payment is collected for an escrow account. Understanding how escrow works helps you plan your monthly housing budget and avoid surprises after closing.

What Is an Escrow Account?

An escrow account — sometimes called an impound account — is a separate account managed by your mortgage servicer. The purpose of the account is to collect money each month so certain property-related expenses can be paid when they come due.

Instead of paying large bills once or twice per year, your mortgage servicer collects a portion of those expenses with your regular monthly mortgage payment. When the tax or insurance bill is due, the servicer pays it on your behalf.

What Does an Escrow Account Usually Pay For?

Escrow accounts are commonly used to pay:

• Property taxes
• Homeowners insurance
• Flood insurance, if required
• Mortgage insurance, if applicable

The exact items included depend on your loan program, property type, location, and lender or servicer requirements.

How Escrow Works With Your Monthly Mortgage Payment

A typical mortgage payment includes several components often referred to as PITI:

• Principal — the amount applied toward the loan balance
• Interest — the cost of borrowing the money
• Taxes — property taxes collected for escrow
• Insurance — homeowners insurance, and possibly other required insurance

For example, if your estimated annual property taxes are $6,000 and your homeowners insurance is $2,400 per year, the servicer may collect approximately $700 per month for escrow — held and later used to pay those bills when they are due.

Important: Escrow is not an extra lender fee. It is money collected to pay property-related expenses that would otherwise be your responsibility as the homeowner.

Why Do Lenders Use Escrow Accounts?

Lenders and servicers use escrow accounts to help ensure property taxes and insurance premiums are paid on time. This protects both the homeowner and the lender. From the homeowner’s perspective, escrow also makes budgeting easier — taxes and insurance are spread across monthly payments instead of arriving as large lump-sum bills.

Can Your Escrow Payment Change?

Yes. Even if you have a fixed-rate mortgage and your principal and interest payment stays the same, your total monthly payment can still increase or decrease because of changes to taxes or insurance.

Common reasons escrow payments change include:

• Property taxes increasing due to reassessment or new levies
• Homeowners insurance premiums rising at renewal
• Flood insurance requirement changes or premium adjustments
• Prior-year escrow shortages being spread across future payments
• Changes in assessed property value

What Is an Escrow Analysis?

Mortgage servicers typically review escrow accounts once per year. This review is called an escrow analysis. The servicer compares the amount collected with the actual tax and insurance bills paid or expected to be paid.

• Escrow shortage — too little was collected. Can result in a higher monthly payment as the shortage is repaid over time.
• Escrow surplus — too much was collected. The excess is typically refunded to you.

Can You Waive Escrow?

In some mortgage transactions, escrow may be waived — more common on certain Conventional loans when the borrower has a larger down payment or sufficient equity. However, escrow waiver rules depend on the loan program, lender, investor, and property details.

FHA, VA, and USDA loans commonly include escrow collection requirements and escrow waiver is generally not available on those programs. Review escrow options early in the mortgage process so there are no surprises at closing.

Why This Matters Before You Buy a Home

Escrow accounts directly affect your total monthly housing payment. When comparing homes, loan options, or payment estimates, it is important to look beyond just the interest rate and principal-and-interest payment. Property taxes and insurance can make a meaningful difference in affordability — especially in North Texas markets where tax rates and insurance premiums have been rising.

The Bottom Line

An escrow account is designed to simplify the process of paying property taxes and insurance. It helps homeowners budget monthly, reduces the risk of missed tax or insurance payments, and gives lenders confidence that key property expenses are being handled.

The main thing to remember: escrow can change. If property taxes or insurance costs go up, your monthly mortgage payment may increase even if your interest rate does not.

Sources

• Consumer Financial Protection Bureau — What is an escrow or impound account?
• Federal Trade Commission — Mortgage Payments Explained

Have Questions About Your Mortgage Payment or Escrow?

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This content is for educational purposes only and is not a commitment to lend or extend credit. Loan approval, program availability, terms, and conditions are subject to borrower qualification, underwriting approval, and applicable guidelines. Equal Housing Lender. Wayne Wallace, NMLS #745186 • Homewood Mortgage, LLC • NMLS #294974.