If your mortgage payment changed and nobody warned you, escrow is probably why. Here's how it works.
What is an escrow account?
An escrow account is a holding account your lender controls. Each month, you pay a portion of your annual property taxes and homeowners insurance into this account — spread out over 12 months so you're not hit with a lump sum bill. When those bills come due, your servicer pays them directly from the escrow account on your behalf.
How your escrow payment is calculated
Your servicer takes your estimated annual property taxes and insurance, divides by 12, and adds that to your monthly payment. They may also keep a cushion in the account as a buffer — federal rules cap it at one-sixth of the year's escrow payments (about 2 months' worth).
The escrow analysis — why your payment changes
Once a year, your servicer reviews the account. If your taxes or insurance went up, they recalculate your escrow payment — which increases your total monthly payment. If they over-collected and you're current, a surplus of $50 or more is refunded within 30 days, and your payment may go down slightly.
Shortage vs surplus
- Shortage: The account didn't have enough to pay the bills. Small shortages (under one month's escrow payment) may be billed within 30 days or spread over 12+ months; larger ones must be spread over at least 12 months — increasing your payment.
- Surplus: They collected too much. If you're current, a surplus of $50 or more is refunded within 30 days (smaller amounts may be credited to next year), and your monthly payment may decrease slightly.
Not all loans require escrow accounts — some conventional loans with 20%+ down allow you to waive escrow and pay taxes/insurance yourself. Check with your servicer.