What is an escrow account?

How an escrow account works

With a mortgage that has escrow, your monthly payment includes a property tax reserve and a homeowners insurance reserve beyond principal and interest. Your servicer holds those funds in a dedicated account and pays your tax bill and insurance premium directly when due. As the CFPB explains, the money comes from a portion of your monthly payment and the servicer manages disbursements.

What escrow covers

• Property taxes — county and local, paid when due.
• Homeowners insurance — your annual premium, paid at renewal.
• Flood insurance — if required based on flood-zone location.
• Other assessments — some loans include HOA fees, though less common.

Why lenders require escrow

Lenders require escrow to protect their collateral. Unpaid property taxes can create a tax lien that takes priority over the mortgage; a lapsed insurance policy leaves the home uninsured. Most federally backed loans (FHA, VA, USDA) require escrow; many conventional lenders do too unless you have significant equity.

Escrow limits and your annual analysis

Under RESPA, lenders may collect up to one-twelfth of total annual escrow payments each month plus a cushion of up to two months. Each year, your servicer performs an escrow analysis and adjusts your payment. If a surplus accumulates above the RESPA cushion, the servicer must refund it. The CFPB's escrow rules cover the framework.

Initial escrow deposit at closing

At closing you'll pay an initial escrow deposit — typically 2–3 months of taxes and insurance — to pre-fund the account. It appears on your Loan Estimate and Closing Disclosure as part of your closing costs.