What Is an Escrow Account in a Mortgage?
A mortgage escrow account is a separate account your lender or mortgage servicer uses to collect and manage money for property taxes and homeowners insurance. Each month, a portion of your mortgage payment is set aside in escrow so these bills are paid automatically when due.
✅ How a Mortgage Escrow Account Works
The lender estimates your annual property taxes and insurance, divides that total by 12, and adds it to your monthly mortgage payment. The funds are held in escrow and disbursed when bills come due. This ensures you never miss important housing payments.
- Automatic payments: Taxes and insurance are paid by your lender on your behalf.
- Budget stability: Costs are spread evenly throughout the year instead of lump-sum payments.
- Annual review: Your escrow balance is reviewed yearly and adjusted if tax or insurance costs change.
💡 Benefits of a Mortgage Escrow Account
Escrow accounts simplify homeownership and protect both the borrower and lender. Here’s why many homeowners prefer them:
- Ensures timely property tax and insurance payments
- Prevents accidental lapses in coverage or penalties
- Provides convenience with one consolidated monthly payment
- Offers peace of mind for new homeowners and lenders alike
🏦 When Is an Escrow Account Required?
Most lenders require escrow accounts when a borrower’s down payment is less than 20%, especially on conventional and government-backed loans. However, once you’ve built sufficient equity, you can often request to remove the escrow requirement and manage payments yourself.
- Required for PMI-backed loans and FHA loans
- Optional for high-equity or refinanced mortgages
- Helps lenders reduce default and delinquency risks
If you refinance or pay off your mortgage early, the remaining escrow balance is refunded directly to you.