What Is a Property Tax Escrow Account?
An escrow account is a holding account managed by your mortgage lender (or servicer) to pay your property taxes and homeowners insurance on your behalf. Instead of paying a large lump sum once or twice a year when taxes are due, you pay one-twelfth of the estimated annual amount each month as part of your mortgage payment. The lender accumulates these funds and pays the tax authority directly when the bill comes due.
For most homeowners with a mortgage, escrow is not optional. Lenders require it to protect their investment in the property, since unpaid property taxes can result in a tax lien that takes priority over the mortgage.
How Your Escrow Payment Is Calculated
Each year, your lender performs an escrow analysis to project your next twelve months of tax and insurance obligations. The calculation works like this:
- Estimate annual property tax based on the most recent tax bill or county records.
- Estimate annual homeowners insurance premium based on your current policy.
- Add both together and divide by twelve to get your monthly escrow payment.
- Include a cushion. Federal law (RESPA) allows lenders to hold a cushion of up to two months of escrow payments as a buffer against unexpected increases.
Your total monthly mortgage payment is therefore: principal + interest + escrow (taxes + insurance). If your property tax or insurance changes, your monthly payment changes too.
Why Your Monthly Payment Changes
One of the most common homeowner frustrations is a mortgage payment that increases even though the interest rate is fixed. The culprit is almost always escrow. Property tax increases, insurance premium hikes, or corrections from the prior year's analysis all flow through to your monthly payment.
Common reasons for escrow payment increases include:
- Property tax reassessment: Your county raised your assessed value, increasing your tax bill.
- Tax rate increase: New levies, bond measures, or mill rate adjustments in your taxing district.
- Insurance premium increase: Annual premium adjustments or loss of discounts.
- Escrow shortage carryover: If last year's analysis underestimated costs, the shortfall is spread over the next twelve months.
Use our property tax calculator to estimate what your taxes should be and verify your lender's projections.
Escrow Shortages and Surpluses
Shortage
When your actual tax or insurance bills exceed what the escrow account collected, you have a shortage. Your lender will notify you and offer two options: pay the shortage in a lump sum, or spread it over the next twelve months (increasing your monthly payment). Most homeowners choose to spread the cost.
Surplus
If the account collected more than needed, you receive a refund. Federal law requires your lender to refund any surplus over fifty dollars within thirty days of the escrow analysis.
Can You Opt Out of Escrow?
Some lenders allow you to waive escrow if you meet certain conditions, typically including:
- At least twenty percent equity in the home (or have paid down to eighty percent loan-to-value)
- Current on all payments with no late payments in the past twelve months
- Willingness to pay a small escrow waiver fee (usually 0.25% of the loan balance)
Without escrow, you are responsible for paying property taxes and insurance directly when due. This gives you more control and potentially earns interest on the funds, but requires discipline. Missing a tax payment can result in penalties, interest, and eventually a tax lien on your property.
Escrow for New Home Purchases
At closing, your lender will collect an escrow deposit to pre-fund the account. This typically covers two to six months of estimated taxes and insurance. Combined with closing costs, this initial escrow deposit is one of the larger cash requirements at closing. Ask your lender for a detailed escrow breakdown before closing day so there are no surprises.
Reviewing Your Escrow Statement
Your lender sends an annual escrow analysis statement. Review it carefully. Verify that the property tax amount matches your actual bill from the county assessor's records. Errors in the lender's tax estimate are surprisingly common and can result in unnecessary payment increases or shortages.