What It Means
On a mortgageMortgageA loan used to buy or refinance a home, secured by the home itself and repaid in monthly installments over a set term. See more, escrow is an account your lender sets up so that property taxesProperty taxA yearly tax your local government charges on real estate you own, worked out from the property's assessed value and the local tax rate. See more and homeowners insurance get paid on time. Part of each monthly payment goes into the account, and the mortgage servicer pays those bills from it when they come due. The Consumer Financial Protection Bureau (CFPB) notes that some places call it an impound account, and that you may be required to have one or may choose to.
Try It: Work Out Your Monthly Escrow and Its Cushion
Example bills to start. Put in this year's bills, then next year's, to see how the escrow part of the payment moves.
The escrow part of the payment goes up by a month, before any shortage from this year is added.
The escrow part of the payment goes down by a month.
The escrow part of the payment stays the same.
How People Say It
- "Our payment went up because of escrow."
- "We got an escrow refund check in the mail."
- "Taxes and insurance are escrowed, so the bank pays them."
The Breakdown
Worked example. A home with a $4,200 property tax bill and $1,800 of homeowners insurance a year:
| Amount | |
|---|---|
| Yearly bills | $6,000 |
| Escrow part of each monthly payment ($6,000 ÷ 12) | $500 |
| Largest cushion the servicer may hold (two months) | $1,000 |
| Next year's bills: tax $4,800, insurance $2,100 | $6,900 |
| New escrow part of each payment ($6,900 ÷ 12) | $575 |
What the result means. The loan's principal and interestInterest rateThe yearly percentage a lender charges for borrowing money, not counting fees; the APR adds certain fees to show a fuller cost. See more haven't changed, yet the monthly payment rises by $75 because the bills it collects for went up. If this year's collections fell short of the higher bills, the account can also show a shortage, and the annual statement tells you how the servicer will have you make it up.
The yearly check. Regulation X requires the servicer to analyze the account and send you an annual escrow statement. A shortage means the balance is below the target the rules allow, and a surplus means it's above it. The cushion, the extra kept against surprises, is capped at two months of escrow payments, unless your state law or loan documents set a lower amount.
Good to Know
The CFPB says a lender can collect enough to keep the account from going negative, plus the two-month cushion, and no more. Read your annual escrow statement when it arrives: it shows what was paid, what's projected for next year and whether you have a shortage or a surplus. Your tax bill and insurance renewal are the two numbers that drive the change, so check them against the statement. If something looks wrong, contact your servicer in writing and keep a copy.
FAQ
Why did my mortgage payment go up if my rate is fixed?
Most likely because of escrow. When your property tax or homeowners insurance rises, the servicer raises the amount it collects each month to cover the new bills.
How big can an escrow cushion be?
Under Regulation X, the cushion can be up to two months of escrow payments, or less if state law or your loan documents say so, on top of what's needed to keep the account from going negative.
What is an escrow shortage?
It's the amount by which your escrow balance falls below the target balance when the servicer does its yearly analysis. A surplus is the opposite, a balance above the target.
Do It in Buhata
Bills, Reminders
With Plus, add your property tax and homeowners insurance renewal dates to Bills, so you can check the amounts against your servicer's annual escrow statement.
Open BuhataRelated Terms and Categories
- Mortgage
A loan used to buy or refinance a home, secured by the home itself and repaid in monthly installments over a set term.
- Private mortgage insurance
Insurance that protects a mortgage lender if the borrower stops paying, often required on a conventional loan with less than 20% down.
- Closing costs
The fees and upfront charges you pay to finalize a mortgage, apart from the down payment, itemized on your Loan Estimate and Closing Disclosure.
- Sinking fund
Money set aside in small, regular amounts for a known future cost, so the bill doesn't land on a single paycheck.
- Fixed interest rate
An interest rate that's set when you borrow and stays the same for the life of the loan, so the monthly payment doesn't change.
- Amortization
Paying off a loan through regular scheduled payments, each split between interest and principal, until the balance reaches zero at the end of the term.
Sources
Consumer Financial Protection Bureau, "What is an escrow or impound account?"; CFPB, "Is there a limit on how much my mortgage lender can make me pay into an escrow account for interest and taxes?"; CFPB, Regulation X, "§ 1024.17 Escrow accounts"; CFPB, "What is PITI?"
- www.consumerfinance.gov/ask-cfpb/what-is-an-escrow-or-impound-account-en-140
- www.consumerfinance.gov/ask-cfpb/is-there-a-limit-on-how-much-my-mortgage-lender-can-make-me-pay-each-month-for-insurance-and-taxes-the-escrow-en-200
- www.consumerfinance.gov/rules-policy/regulations/1024/17
- www.consumerfinance.gov/ask-cfpb/what-is-piti-en-152
Last updated .