What Is Escrow, and Why Did My Mortgage Payment Change?

What an escrow account is

The Consumer Financial Protection Bureau (CFPB) describes an escrow account, sometimes called an impound account, as an account set up by your mortgage lender to pay certain property-related expenses. The money comes from a portion of your monthly mortgage payment, and your servicer pays the bills on your behalf^[1].

The usual items are property taxes and homeowners insurance. Depending on the loan, escrow can also cover flood insurance or mortgage insurance. Many lenders require escrow so they can be sure those bills get paid, and sometimes it is required by law^[1].

Not every loan has escrow. Without it, you pay the tax and insurance bills yourself, and the CFPB notes that failing to pay property taxes can lead to fines, penalties or a tax lien, and could ultimately put the home at risk of foreclosure^[1]. With escrow, the idea is to turn one or two large bills a year into twelve smaller pieces. So a typical monthly mortgage payment really has several parts: principal, interest, and the escrow deposit for taxes and insurance, plus PMI if the loan has it^[3].

How the monthly escrow amount is set

The federal rule that governs most escrow accounts, part of Regulation X under the Real Estate Settlement Procedures Act, lets the servicer collect each month one-twelfth of the total escrow bills it reasonably expects to pay over the year. On top of that, it may keep a cushion of no more than one-sixth of the estimated yearly payments from the account^[2].

• Monthly deposit: total expected yearly escrow bills ÷ 12. For every $1,200 of yearly tax and insurance bills, that is $100 a month.
• Maximum cushion: total expected yearly escrow bills ÷ 6. For every $1,200 of yearly bills, the cushion can be at most $200.

The cushion is a buffer so the account does not run dry if a bill arrives a little higher than expected. The rule caps it, but a servicer may keep less, or none.

The yearly escrow analysis and statement

Once a year the servicer reviews the account: what it paid out, what came in, and what it expects to pay next year. Under Regulation X, the servicer must send an annual escrow account statement within 30 days of the end of the escrow computation year, and must do an escrow analysis before sending it^[2].

The statement lists each payment into and out of the account. If there are several taxing bodies or insurers, it should identify each one, for example "City Taxes," "School Taxes" or "Hazard Insurance"^[2]. That makes it a good place to see exactly which bill changed.

Property taxes and insurance premiums can change from year to year, and your escrow payment, and with it your total monthly payment, will change accordingly^[1]. This is the most common reason a fixed-rate mortgage payment goes up. The rate on the loan did not change; the bills escrow pays did.

Shortages, deficiencies and surpluses

The analysis can find one of three things. A surplus means the account has more than needed. A shortage means the projected balance will fall short of the target. A deficiency means the account actually went negative because the servicer advanced money to pay a bill. Regulation X sets rules for each^[2]:

Being "current" matters for the surplus refund: the rule treats a borrower as current if the servicer receives payments within 30 days of the due date^[2]. A new monthly payment after an analysis often reflects two things at once: the higher ongoing bills, plus repayment of a shortage spread over the next year. Once the shortage is repaid, that second piece drops off, though the higher ongoing amount remains.

Deficiencies follow similar rules. If the deficiency is less than one month's escrow payment, the servicer may leave it, ask for repayment within 30 days, or ask for it in two or more equal monthly payments; larger deficiencies have their own repayment limits^[2]. Your annual statement should say which option the servicer chose.

Checking your own escrow statement

1. Compare the tax payments on the statement with your actual property tax bills from your local tax office.
2. Compare the insurance payment with your policy's premium on the declarations page.
3. Look at the projected payments for next year and ask yourself whether they match what you know: did your assessment go up, or your insurance renew at a new price?
4. If your assessment went up and you think it is wrong, your local assessor's office explains the appeal process and its deadline. A change in the tax bill eventually flows into escrow.

Your servicer is the company that collects your payments and runs escrow; it may be different from the lender that made the loan^[4]. If you think there is an error, start by contacting the servicer in writing. If it is not resolved, you can submit a complaint to the CFPB^[5]. Mortgage and property tax calculators are on our tools roadmap to help you see how each piece affects the monthly payment, and the housing category covers other housing costs.