How it works
Each month, part of your payment goes into the account. When the tax bill or insurance premium is due, the servicer pays it for you. The idea is to spread large bills across the year and protect the lender's interest in the property.
Some loans require an escrow account, while others let you waive it, sometimes with a cost or a larger down payment.
The deposit at closing
At closing you often fund an initial escrow deposit so the account has a cushion. The Closing Disclosure shows this under prepaid items and initial escrow payment. A lender may collect a few months' worth of reserves, within limits set by federal rules.
Check that the amounts match the monthly figures on page one.
Why your payment changes
If taxes or insurance premiums rise, the servicer raises the monthly escrow portion. This is why your mortgage payment can increase even with a fixed interest rate. Servicers do an annual analysis and send a statement showing expected bills.
A shortage means the account does not hold enough. A surplus means it holds extra, which may be refunded.
What to do about changes
Review the annual statement. If an insurance premium went up, shop for coverage and tell the servicer about the new policy. If a tax assessment looks wrong, ask the local assessor about an appeal process. Pay any shortage under the options the servicer offers.
Never ignore a notice. Missed taxes or lapsed insurance can lead to the lender buying costly coverage on your behalf.
Signing day angle
The signing package may include an escrow account disclosure and an authorization. The signing agent can show you where each page is, but cannot explain your numbers. Questions about your payment belong with the lender. Keep your closing paperwork so you can compare it to later statements.
Reading the annual statement and keeping control
The statement lists projected payments for the next twelve months, the monthly amount needed, the lowest balance allowed, and any shortage or surplus. Match the tax and insurance figures with your latest bills. If the servicer paid the wrong amount, contact them promptly and keep copies of the correspondence.
If you changed insurers, make sure the servicer has the new policy so the bill is paid on time.
Homeowners who pay their own taxes still have to prove payment to the lender. Those who rely on the servicer should still watch bills. Mistakes happen, and a missed property tax payment can lead to penalties. Set a yearly reminder to compare the servicer's payments to the actual bills.
If you are comparing loan offers, include the escrow requirement in your comparison. A loan that lets you waive escrow may carry a higher rate or a fee, while one that requires it may give you more predictable bills. Ask each lender to put the numbers on paper so you can see the real monthly difference.
Common questions
Can I cancel my escrow account later?
Some lenders allow it once the loan has been paid down enough or after a period of on-time payments. Ask your servicer about the rules and any fee.
Why did my payment go up when the rate is fixed?
Taxes or insurance rose, and the servicer increased the escrow portion of your payment.
Does the notary handle escrow questions?
No. Escrow questions go to your lender or servicer.
This guide is general information, not legal advice. Fees and procedures change; check with the office involved or an attorney for your situation.