Escrow account
An escrow account — sometimes called an impound account — is held by the mortgage servicer to pay property taxes and homeowners insurance on the borrower's behalf. Part of each monthly payment goes in, and the servicer pays the bills as they come due.
Why lenders want one#
A lender's security is the property. Unpaid property taxes become a lien that outranks the mortgage, and an uninsured house that burns down leaves the lender with a loan secured by nothing. Collecting a twelfth of the annual bill each month removes both risks and removes the borrower's ability to spend the money on something else.
That is also why escrow is usually mandatory below twenty percent equity, and optional above it.
What goes into it#
Property taxes and hazard insurance always. Often mortgage insurance premiums, flood insurance where required, and in some places special assessments levied against the property.
What does not go in: HOA dues, utilities, and voluntary coverage the lender did not require. Those stay the borrower's direct responsibility, which catches people who assume escrow covers everything with the word "property" attached.
The cushion#
Servicers are permitted to hold a reserve above what the year's bills require — generally up to two months of escrow payments — so a mid-year increase does not empty the account. Anything above that allowed cushion is a surplus and must come back to the borrower.
The cushion is why a balance that looks generous can still trigger a shortage notice. The test is not whether the account has money in it. The test is whether it has enough to cover the coming year plus the reserve.
Where it goes wrong#
Escrow is the quietest part of a mortgage until it is the loudest. Taxes rise, insurance renews higher, and the monthly payment moves without the interest rate changing at all. Borrowers on fixed-rate loans are frequently astonished that a fixed-rate payment went up.
An escrow account is therefore worth understanding before it surprises you, not after. The annual escrow analysis is the document that tells you what is coming.
Waiving it#
Where the loan permits it, a borrower with sufficient equity can ask to pay taxes and insurance directly rather than through escrow. Lenders often charge a fee for the waiver, and government-backed loans generally do not allow one at all.
The trade is real in both directions. Paying directly keeps the money earning interest and gives control over which insurer to use and when to pay. It also means the annual tax bill and the insurance renewal arrive as large single demands, with nobody having set the money aside.
Waivers are usually revocable. Miss a tax payment and the servicer can reinstate escrow, typically with the missed amount added.