Dan Green

Dan Green

Since 2003, Dan Green has been a leading mortgage lender and respected industry authority. His unwavering commitment to first-time home buyers and home buyer education has established him as a trusted voice among his colleagues, his peers, and the media. Dan founded Homebuyer.com to expand the American Dream of Homeownership to all who want it. .

Queen Anne Home Seattle - Escrow

How We Make Money

Homebuyer.com is your trusted guide to homeownership. Since 2003, our team has offered real-world expertise and advice to tens of millions of U.S. home buyers. Our content stands on its integrity: it's factual, unbiased, and free from outside influences. Read our editorial guidelines.

Homebuyer.com is a mortgage-company-affiliated publisher. We earn compensation when you click specific links on the website, or apply for a mortgage with Homebuyer.com or a partner listed in our comparison tables. Our partners compensate us differently, so we randomize our tables to protect our readers from steering. We may also earn compensation for advertisements on the site, which are indicated clearly. Note that limitations in our software, whether we originate mortgages in your area, and credit factors may affect the offers and comparison tables you see on various parts of this site. We do not include offers for every mortgage product available. Someday, we hope we will.

Trusted Content

Trusted Content

This article was checked for accuracy as of February 26, 2024. Homebuyer.com ensures every piece of information we share reflects the latest in mortgage standards. Learn more about our commitments in our editorial guidelines.

What is Escrow?

Escrow is a financial arrangement where a homeowner pays portions of their real estate tax and homeowners insurance monthly to their lender, who then pays the bills when due.

What Is Escrow: Explained For First-Time Home Buyers

A Longer Definition: Escrow

Escrow is a financial arrangement between a mortgage lender and a homeowner where:

  1. The homeowner pays one month of their annual real estate tax bill and homeowners insurance premium in their monthly PITI to their lender
  2. The lender pays the homeowner’s taxing authority and insurance company as the bills come due

Some mortgage types, such as FHA mortgages and USDA mortgages, require home buyers to establish an escrow account as part of their approval with limited exemptions.

Other types, such as conventional mortgages, require escrow only when home buyers use low-downpayment mortgages to purchase their home.

Escrow accounts are established at closing. In some parts of the country, they’re known as impound accounts.

A home buyer’s escrow contribution changes annually as their tax and insurance bills change. Starting escrow balances and estimated payments are based on prior year expenses, with a two-month cushion added in to ensure the account has sufficient funds to cover increases in costs.

Mortgage companies review escrow accounts annually for accuracy and over-collection. When a lender determines it over-withheld money from a home buyer, it’s required to issue an escrow refund.

Conversely, buyers must make up a difference if there’s a shortfall. Escrow true-ups can be handled via a one-time payment or by adjusting a mortgage payment upward to cover the escrow account deficiency.

Escrow: A Real World Example

Consider a first-time home buyer who has just closed on a house. As part of their mortgage agreement, their lender sets up an escrow account to handle property taxes and homeowners insurance.

As part of their monthly mortgage payment, the homeowner pays a portion of their estimated annual taxes and insurance premiums which go into escrow. Then, when the tax and insurance bills come due, the lender uses the money in escrow to pay the homeowner’s bills.

The escrow arrangement is helpful for the homeowner because it splits up two large annual bills into 12 smaller payments and offers a convenient and worry-free way to pay them. For the lender, escrow is a guarantee that the home’s tax bill will stay current and its insurance policy won’t lapse.

Common Questions About Escrow

Why did my mortgage payment go up?

When a homeowner’s mortgage payment goes up, and they don’t have an adjustable-rate mortgage, the likely culprit is escrow. When a homeowner’s escrow withholdings are too small to cover next year’s projected bills, the monthly PITI is raised to pay for the projected shortfall.

How much is escrow each month?

A homeowner’s escrow payment is one-twelfth of the estimated annual cost for property taxes and homeowner’s insurance on a property. For example, if your home’s taxes and insurance are $1,200 per year combined, your monthly escrow payment is $100.

What happens if there’s not enough money in my escrow account when my bills come due?

If your escrow account has a shortage when the bills come due, your lender will usually cover the shortfall on your behalf. Then, the lender will require you to make up the difference by either a lump sum payment or adjusting your future monthly escrow payments.

What happens if there’s too much money in my escrow account?

Mortgage lenders conduct annual reviews of escrow accounts. When an escrow account is over-populated, the lender refunds the excess escrow immediately.

Do escrow payments change over time?

Yes, escrow payments change over time. Each year, lenders conduct escrow analyses based on prior-year tax bills and insurance premiums. When a homeowner’s monthly escrow payment is too large or small, the lender notifies the homeowner and make adjustments in upcoming payments.

Is it possible to cancel an escrow account?

Sometimes, homeowners can cancel their escrow account if they have enough equity in their home, though this varies by mortgage company and loan type. Canceling escrow means the homeowner is responsible for paying property taxes and insurance premiums directly.

What happens to my escrow account when I pay off my home?

When a home is owned free-and-clear, there is no mortgage company to manage an escrow account. Homeowners without a mortgage are responsible for paying property taxes and insurance premiums directly.

Are escrow accounts good?

Many homeowners like using an escrow account because it simplifies budgeting for property taxes and insurance premiums and protects against tax liens or lapses in insurance coverage. Lenders like escrow accounts for the same reasons.


This article, "What is Escrow?" draws on the author's professional mortgage experiences and references information found at these authoritative websites:

What to do next

See how much home you can afford to buy. Use our no-risk Immediate Mortgage Approval and find your mortgage eligibility in an instant.

Get approved here.

       Escrow is a financial arrangement where a homeowner pays portions of their real estate tax and homeowners insurance monthly to their lender, who then pays the bills when due.

Subscribe to our Newsletter

Be a better buyer. Subscribe now and never miss out on exclusive insights, new market trends, and first-time buyer programs.

Ready to get started?

Finding your dream starts here. Apply in minutes.

Get Pre-approved
© 2021-2024 All rights reserved. Growella Inc d/b/a Homebuyer. Homebuyer.com is powered by Novus Home Mortgage, a division of Ixonia Bank, NMLS 423065. www.nmlsconsumeraccess.org Homebuyer is located at 230 Findlay Street, Cincinnati, Ohio 45214. Novus Home Mortgage, a division of Ixonia Bank, is located at 20225 Water Tower Blvd. Suite 400, Brookfield, WI 53045. We have no affiliation with the US Department of Housing and Urban Development, the US Department of Veterans Affairs, the US Department of Agriculture, or any other government agency. US Government agencies have not reviewed this information and this site is not connected with any government agency. Equal Housing Lender. Applicant subject to credit and underwriting approval. Not all applicants will be approved for financing. The receipt of the application does not represent an approval for financing or interest rate guarantee. Restrictions may apply.