An escrow account is the part of your mortgage payment that pays your property taxes and homeowners insurance for you.
Your servicer collects a little each month and pays the big bills when they come due. This post covers what escrow pays, how the payment is figured, why it changes, and when you can skip it. The rules come from federal law and the agency handbooks.
Last updated: November 14, 2026
Guidance reference: 12 CFR 1024.17, Regulation X (current as of October 23, 2026); 12 CFR 1026.35, Regulation Z; HUD Handbook 4000.1, III.A.1.g (Update 18)
What Is an Escrow Account? The Short Answer
As of November 2026: an escrow account is an account your mortgage servicer uses to pay your property taxes and homeowners insurance from part of each monthly payment (CFPB). The servicer can hold a cushion of no more than one-sixth of the year’s bills, about two months, and must review the account every year (12 CFR 1024.17). FHA loans require escrow (HUD Handbook 4000.1, III.A.1.g), and higher-priced loans must keep it at least five years (12 CFR 1026.35).
Two Kinds of Escrow
People use the word escrow two ways. When you buy a home, your earnest money and the closing are held “in escrow” by a title or escrow company until the sale closes. That escrow ends at closing.
The escrow account on your mortgage is different. It starts at closing and lasts as long as the loan, or until it is removed. This post is about that one.
What an Escrow Account Pays
| Bill | Paid through escrow? |
|---|---|
| Property taxes | Yes |
| Homeowners insurance | Yes |
| Mortgage insurance | Yes, when the loan has it |
| Flood insurance | Yes, when it is required |
| HOA dues | Usually no; you pay the HOA directly |
If your servicer pays a bill from escrow, it has to come from the account on time. You still want to forward any tax or insurance notice you get, so nothing is missed.
If you are a veteran with a 100% disability rating in a state that waives your property taxes, the tax part of escrow can drop to $0 once the exemption is on the tax bill. That applies to a VA loan or any other loan.
How Your Escrow Payment Is Figured
Your servicer adds up the bills it expects to pay over the next 12 months, divides by 12, and adds a cushion. Federal rules cap that cushion at one-sixth of the year’s bills, which is about two months.
| Item | Yearly | Monthly |
|---|---|---|
| Property taxes | $3,600 | $300 |
| Homeowners insurance | $1,800 | $150 |
| Escrow payment | $5,400 | $450 |
| Largest cushion allowed (one-sixth) | $900 | — |
Source: 12 CFR 1024.17(c).
That $450 is added to your principal and interest. Together they make up the monthly payment you see on your statement. The figures above are an example.
Escrow at Closing
At closing, you put money into the account to get it started. That deposit covers the gap between closing and the first bills, plus the cushion. It shows on your Closing Disclosure as the initial escrow payment, separate from your down payment.
Prepaid items are also paid at closing. Those are costs you pay ahead, like the first year of homeowners insurance and the interest from closing to the end of the month. The escrow deposit and prepaid items are often the reason cash to close is higher than people expect.
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See What I Qualify ForThe Yearly Escrow Review
Once a year, your servicer reviews the account and sends you a statement within 30 days of the end of the escrow year. Three things can happen.
| Result | What it means | What the servicer can do |
|---|---|---|
| Surplus | More money than needed | Refund $50 or more within 30 days if you are current; under $50 can be refunded or credited |
| Shortage | Not enough for next year’s bills plus the cushion | Under one month’s escrow payment: ask for it in 30 days or spread it out. One month or more: spread it over at least 12 months |
| Deficiency | The account went negative | Ask you to repay it, in one or more payments depending on the size |
Source: 12 CFR 1024.17(f), (i).
After the review, your monthly escrow payment is reset to match the new bills.
Why Your Escrow Payment Went Up
Most escrow increases come from two things: your property taxes went up after a reassessment, or your insurance premium went up at renewal. If last year came up short, the shortage is added on top.
It is not your interest rate. On a fixed-rate loan, principal and interest stay the same. Only the escrow part moves.
Is an Escrow Account Required?
| Loan | Escrow |
|---|---|
| FHA | Required for taxes, hazard insurance, and FHA mortgage insurance |
| Higher-priced loan (APR well above the market average) | Required; you can ask to remove it no sooner than 5 years after closing |
| Conventional | Often required by the lender; some loans allow you to skip it |
Source: HUD Handbook 4000.1, III.A.1.g; 12 CFR 1026.35(b).
A higher-priced loan is one where the APR is 1.5 percentage points or more above the average rate for a similar loan, or 2.5 points or more on a jumbo loan. On those loans, you can ask to drop escrow after five years only if your balance is under 80% of the original value and you are not behind on payments.
Skipping escrow means you pay the tax and insurance bills yourself, in large lump sums. If they go unpaid, the servicer can add escrow back or buy insurance for you, which usually costs more.
Escrow Myths
❌ Myth: “Escrow is an extra fee.”
✅ Fact: Escrow is your own money, set aside to pay your own tax and insurance bills. The only extra is a cushion, capped at about two months.
❌ Myth: “My payment went up, so my rate went up.”
✅ Fact: On a fixed-rate loan, the rate does not change. Higher taxes or insurance raise the escrow part of the payment.
❌ Myth: “I can never get rid of escrow.”
✅ Fact: Many conventional loans let you remove it once you meet your servicer’s rules. Higher-priced loans can after five years. FHA loans keep it.
Escrow Account FAQ
What is an escrow account?
An escrow account is an account your mortgage servicer sets up to pay your property taxes and homeowners insurance for you. Part of each monthly mortgage payment goes into it. When the tax bill or insurance renewal comes due, the servicer pays it from the account.
What does an escrow account pay for?
Escrow pays property taxes and homeowners insurance. It can also pay mortgage insurance and flood insurance when your loan requires them. HOA dues are usually paid by you directly, not through escrow.
Why did my escrow payment go up?
Your escrow payment goes up when your property taxes or insurance premium go up, or when the account came up short last year. Your servicer reviews the account once a year and resets the payment to match the new bills.
Is an escrow account required?
It depends on the loan. FHA loans require escrow for taxes, hazard insurance, and mortgage insurance. Higher-priced loans must have escrow for at least five years. Many lenders require escrow on other loans too, and some conventional loans let you skip it.
How much extra can a servicer hold in escrow?
Federal rules let a servicer keep a cushion of no more than one-sixth of the year’s escrow bills, which is about two months of payments. Your loan documents can set a lower cushion.
What happens if there is extra money in my escrow account?
If the yearly review shows a surplus of $50 or more and you are current on payments, the servicer must refund it within 30 days. A surplus under $50 can be refunded or credited to next year’s payments.
What is an escrow shortage?
An escrow shortage means the account will not have enough to pay next year’s bills plus the cushion. Your servicer can ask you to repay it, but if the shortage is one month’s escrow payment or more, it must let you spread it over at least 12 months.
Can I get rid of my escrow account?
Sometimes. On many conventional loans, you can ask your servicer to remove escrow once you meet its rules. On a higher-priced loan, you can ask no sooner than five years after closing, with a balance under 80% of the original value and no late payments. FHA loans keep escrow.
Related Pages
About the Author
J.D. Peck is an Area Manager and Mortgage Loan Originator (NMLS #314883) with the JD.Mortgage Team at Paramount Residential Mortgage Group, Inc. (NMLS #75243), based in Colorado Springs. 25+ years, 3,100+ closed loans, Scotsman Guide Top Originator 2026. Lending in 49 states. New York excluded.
Last updated: November 14, 2026. Escrow facts sourced from 12 CFR 1024.17 (Regulation X), 12 CFR 1026.35 (Regulation Z), the CFPB, and HUD Handbook 4000.1.
Source: JD.Mortgage Team at PRMG, What Is an Escrow Account?, updated November 2026, https://jd.mortgage/what-is-an-escrow-account/
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