Process
Escrow
A neutral third-party arrangement where money or documents are held until certain conditions are met. During a home purchase, earnest money is held in escrow until closing. After closing, your lender may maintain an escrow account to collect a portion of your property taxes and homeowners insurance with each monthly payment, then pay those bills on your behalf when they come due.
Why It Matters
An escrow account is a holding account managed by your mortgage servicer to pay your property taxes and homeowners insurance on your behalf. Instead of paying two large bills per year (taxes and insurance), the costs are divided into 12 monthly installments added to your mortgage payment. Most lenders require escrow on loans with less than 20% down.
Your escrow payment is recalculated annually through an escrow analysis. If your property taxes or insurance rates increase, your monthly payment goes up. If they decrease, you may get a refund or lower payment. Escrow shortages (when the account doesn't have enough to cover a payment) are common — your servicer will either increase your monthly escrow amount or ask for a one-time payment.
Real-World Example
Annual property tax: $4,200. Annual insurance: $1,800. Total escrow: $6,000/year = $500/month added to your mortgage payment. If taxes increase to $4,800 next year, your escrow jumps to $550/month — a $50 increase that shows up as a higher mortgage bill.
Pro Tip
Review your annual escrow analysis statement carefully. If you think your property tax assessment is too high, appealing it can lower your escrow — and therefore your monthly payment.