Introduction
Many homeowners in the United States are surprised when their monthly mortgage payment changes, even though they have a fixed interest rate. In most cases, the change is not related to the loan itself, but to adjustments in the escrow account.
Mortgage escrow accounts are commonly used by lenders and servicers to collect and pay property taxes and insurance premiums on a borrower’s behalf. Because these costs can change over time, escrow-related payments may increase or decrease from year to year.
This article provides an educational overview of how escrow accounts function in the U.S., what expenses they typically include, and why payment amounts can fluctuate.
What Is a Mortgage Escrow Account?
A mortgage escrow account is a separate account managed by the loan servicer to collect funds for certain recurring property-related expenses. These funds are held until bills are due and then paid on behalf of the homeowner.
Escrow accounts commonly cover:
- Property taxes
- Homeowners insurance premiums
- Flood insurance (when required)
- Mortgage insurance (when applicable)
The servicer estimates annual costs and divides them into monthly escrow payments included with the mortgage payment.
Why Lenders Use Escrow Accounts
Escrow accounts are designed to reduce risk for both lenders and borrowers by helping ensure that critical property-related obligations are paid on time.
From a lender’s perspective, escrow helps:
- Prevent tax liens on the property
- Ensure continuous insurance coverage
- Protect the collateral securing the loan
From a borrower’s perspective, escrow can:
- Spread large annual bills into monthly amounts
- Reduce the need for lump-sum tax or insurance payments
Many lenders require escrow, particularly for loans with higher loan-to-value (LTV) ratios.
What Costs Are Typically Included in Escrow
Property Taxes
Local governments assess property taxes annually or semiannually. Tax amounts can change due to:
- Reassessments
- Rate adjustments
- Local budget changes
Because tax bills are outside the lender’s control, changes are reflected through escrow adjustments.
Homeowners Insurance
Insurance premiums are influenced by:
- Claim history
- Rebuilding costs
- Regional risk factors
- Market availability
Premium changes are a common reason for escrow payment increases.
Flood and Mortgage Insurance
When applicable, flood insurance or mortgage insurance premiums may also be included in escrow calculations.
Why Monthly Payments Can Change
Even with a fixed-rate mortgage, escrow-related costs can fluctuate.
Property Tax Increases
Reassessments or rate changes can raise annual tax bills, increasing escrow requirements.
Insurance Premium Adjustments
Premium increases—particularly in high-risk regions—can significantly affect escrow balances.
Escrow Shortages
If prior estimates were too low, an escrow shortage occurs. Servicers may:
- Spread the shortage over future payments, or
- Require a one-time adjustment
Escrow Overages
If estimates were too high, an escrow overage may result in:
- A refund, or
- Reduced future escrow payments
Annual Escrow Analysis
Mortgage servicers perform an annual escrow analysis to compare:
- Funds collected
- Bills paid
- Projected upcoming expenses
Based on this review, the servicer adjusts the escrow portion of the payment to align with expected costs.
Borrowers typically receive an escrow analysis statement explaining the changes.
Escrow Cushions and Limits
Federal regulations allow servicers to maintain a limited escrow cushion, usually up to:
- Two months of escrow payments
The cushion is intended to protect against unexpected increases and timing mismatches.
Escrow vs. Paying Taxes and Insurance Directly
Some borrowers may qualify to pay taxes and insurance directly rather than through escrow. However:
- Escrow waivers may require stronger credit profiles
- Some lenders charge higher rates or fees
- Availability varies by loan program
Escrow requirements are determined by lender policy and applicable regulations.
Why Escrow Matters for Budgeting
Escrow affects:
- Monthly housing costs
- Cash flow predictability
- Long-term affordability
Understanding escrow helps explain why payments may change even when loan terms remain the same.
Common Misunderstandings About Escrow
- Escrow increases are not interest rate changes
- Servicers do not control tax or insurance pricing
- Payment changes reflect updated cost estimates
Author Information
Written by:
Beenish Rida Habib — Mortgage & Lending Contributor, ACT Global Media
Editorial Disclosure
This article is provided for general informational purposes only and does not constitute mortgage, tax, financial, or legal advice.
Regulatory Notice
Escrow practices vary by lender, loan type, location, and applicable laws and regulations.
