An escrow account is a separate account managed by your mortgage servicer to pay your property taxes and homeowners insurance when they're due. Each month, a portion of your mortgage payment goes into escrow. When tax or insurance bills arrive, the servicer pays them from this account. This ensures these critical bills are always paid — protecting both you and the lender.
| Component | Meaning | Example ($300K loan) |
|---|---|---|
| Principal | Loan balance repayment | $271/mo (year 1) |
| Interest | Cost of borrowing | $1,625/mo |
| Taxes | Annual property tax ÷ 12 | $250-$500/mo |
| Insurance | Annual homeowners insurance ÷ 12 | $100-$200/mo |
Each year, your servicer performs an escrow analysis comparing projected tax/insurance costs to your current escrow balance. If costs increased (common — property taxes go up), you'll have a shortage. You can either: pay the shortage as a lump sum, or spread it over 12 months as a higher monthly payment. If there's a surplus (rare — costs went down), the servicer refunds it if it exceeds $50.
RESPA regulations require servicers to maintain a minimum cushion of 2 months of escrow payments but no more. If your account exceeds the allowed balance, you must receive a refund.
You may be able to cancel your escrow account (pay taxes and insurance yourself) if: your loan is conventional and you have 20%+ equity (LTV ≤ 80%), you have no escrow shortage, and your loan is at least 1 year old with no late payments. FHA loans require escrow for the life of the loan. VA loans allow escrow waivers at lender discretion. To cancel: contact your servicer, submit a written request, and meet their requirements. Some lenders charge a waiver fee (typically 0.25% of the loan amount). Consider carefully — you'll need discipline to save for large annual tax bills.