Escrow, property taxes, and homeowners insurance

What an escrow account is

An escrow account (sometimes called an "impound account") is a savings-like account the lender holds on your behalf to pay your property tax and homeowners insurance bills. Each month, a portion of your mortgage payment goes into this account. When the tax bill or insurance renewal hits, the lender pays it directly out of escrow.

You’re still the one paying — escrow just smooths a couple of big annual bills into 12 equal monthly pieces.

What goes in (and out) of escrow

Each month, your mortgage payment is split into pieces. The escrow portion typically funds:

• Property taxes

  Annual or semi-annual bill from your county or city. Lender escrows 1/12th of the annual amount each month and pays the bill when due.

• Homeowners insurance (hazard insurance)

  Your policy renews annually. Lender escrows 1/12th of the annual premium each month and pays the renewal premium directly to your carrier.

• Mortgage insurance (PMI / MIP)

  Some lenders include PMI in the escrow line. Others handle it as a separate item on your statement.

• Flood insurance (when required)

  If your home is in a FEMA-designated flood zone, flood insurance is required and gets escrowed alongside hazard insurance.

The annual escrow analysis

Once a year (usually around the same month every year, often the anniversary of your closing), the lender performs an escrow analysis. They look at:

• What was paid out of escrow over the last 12 months
• What’s expected to be paid over the next 12 months (based on the latest tax assessments and insurance renewals)
• The current escrow balance
• The required minimum balance ("cushion" — usually 2 months of escrow payments)

Then they issue you an analysis statement that says one of three things:

1. Shortage — costs went up faster than projected. You either pay the shortage in a lump sum or your monthly payment increases to cover it over the next 12 months.
2. Surplus — costs were lower than projected. The lender refunds the surplus (anything over $50 by federal RESPA rules) and may lower your monthly payment.
3. Balanced — escrow projection is on track. No payment change.

What if my taxes or insurance change?

Property tax reassessment

Most counties reassess property values periodically — annually, every 2 years, or every 5 years depending on the state. After a reassessment, your tax bill can change meaningfully. If you can document an unfair assessment, most counties have a formal protest process. Even successful protests rarely reduce taxes more than 5–15%, but on a $10,000/year tax bill that’s real money.

Homeowners insurance renewals

Insurance renewals are repriced based on:

• Industry-wide rate changes (especially after major regional events)
• Your home’s rebuild cost (which is generally rising)
• Your claims history (one claim can bump your premium 20%+ for years)
• The carrier’s reinsurance costs

Coastal Florida, Texas, Louisiana, and California (wildfire zones) have seen 20–60% premium hikes in recent years. Shop your insurance annually — switching carriers at renewal is normal, and the lender just needs the new policy declarations sent in.

Can I waive escrow?

Sometimes, yes. Conventional loans typically allow you to "waive" escrow if you put 20%+ down and the loan is under certain LTV thresholds. There’s sometimes a small rate adjustment or fee for waiving (often 0.125% on the rate or a $250–$1,000 fee).

FHA, VA, and USDA loans require escrow — there’s no waiver option. Same on most jumbo and high-LTV Conventional loans.

Reading your monthly statement

Your monthly mortgage statement shows the same numbers every month but breaks them out:

• Principal: The portion paying down the loan.
• Interest: The portion paying the bank for the loan.
• Escrow: Your tax and insurance contribution this month. Going into the escrow account.
• Total payment due: P + I + Escrow + (any optional add-ons like life insurance riders).

Your statement also typically shows:

• Year-to-date interest paid (useful for tax time)
• Current escrow balance
• Outstanding principal balance
• Next payment due date

Common questions