When purchasing a home, most buyers focus on their mortgage interest rate and monthly principal and interest payment.
However, your total monthly housing expense may include other important costs, such as property taxes and homeowners insurance. This is where a mortgage escrow account comes into play.
The short answer: an escrow account is managed by your mortgage servicer to collect and pay property-related expenses like taxes and insurance through your monthly payment. Even with a fixed-rate mortgage, your total payment can change when these expenses rise. A licensed loan officer can help you understand how mortgage loan options handle escrow.
What is a mortgage escrow account?
An escrow account is an account managed by your mortgage servicer to collect and pay certain property-related expenses.
Instead of paying large property tax and insurance bills separately, you contribute toward these expenses through your monthly mortgage payment. The servicer then uses the collected money to pay eligible bills when they are due.
What expenses can escrow cover?
Depending on your mortgage and escrow arrangement, the account may cover:
Property taxes
Local governments collect property taxes to support services such as schools, infrastructure and public facilities.
Homeowners insurance
Insurance helps protect your property against covered losses.
Other eligible expenses
Certain additional property-related charges may be included depending on your mortgage agreement.
Not every mortgage uses escrow for every expense.
Why can your mortgage payment increase?
One important detail about escrow is that property taxes and insurance premiums can change.
Even when you have a fixed-rate mortgage, your overall monthly payment may increase if these expenses rise. For example, if your property taxes increase after an assessment or your homeowners insurance premium goes up, your servicer may need to collect more money each month.
This does not necessarily mean your mortgage interest rate has changed. Use our mortgage calculator to see how principal and interest fit into your total payment.
What is an escrow shortage?
An escrow shortage happens when the available amount in your escrow account is less than the required amount for upcoming payments and reserves. This can happen because property taxes or insurance costs increased.
Your servicer generally conducts an escrow analysis and explains the account balance and any adjustment. Depending on applicable rules and your servicer's policy, you may have options for paying a shortage or adjusting your monthly payments.
Always review your escrow statement carefully.
How to manage your escrow account
Here are some practical homeowner tips:
- Review your annual escrow statement.
- Check property tax assessments.
- Compare homeowners insurance renewal costs.
- Contact your servicer if an escrow payment looks incorrect.
- Keep enough room in your monthly budget for changes.
Do all mortgage loans require escrow?
Not necessarily. Requirements depend on the loan program, lender, transaction and applicable rules.
Some borrowers may have an escrow account included in their mortgage, while other arrangements may allow them to pay certain expenses independently. Ask your mortgage professional about the available options.
Frequently asked questions
Is escrow included in my monthly mortgage payment?
When your mortgage uses escrow, your monthly payment generally includes a contribution toward eligible property expenses.
Can my payment increase if my interest rate is fixed?
Yes. Property taxes and insurance premiums can change even when the principal and interest rate remain fixed.
What happens if I have an escrow shortage?
Your servicer will generally provide an escrow analysis showing the shortage and available repayment options.
Can I manage property taxes without escrow?
Some mortgage arrangements may allow this, subject to applicable requirements.
Stay informed about your homeownership costs
Understanding your mortgage payment helps you plan for the long term. Vesta Lending is here to help you explore mortgage solutions and understand the financing process. When you are ready, get a free quote or get pre-approved with Alex.
You can also call Alex Al-Ammar at (313) 992-9898 or email Alex@vestalending.com.
This article is for general information only. It is not legal, tax or financial advice. Loan programs, guidelines and eligibility depend on your credit, income, property and lender requirements. Escrow rules vary by lender and loan program. Speak with a qualified professional about your individual situation.
Official reference: Consumer Financial Protection Bureau — What is an escrow or impound account?
