What Is Escrow in a Mortgage?
In mortgage lending, escrow refers to a holding account managed by your loan servicer. Each month, a portion of your mortgage payment is deposited into this escrow account. When your property tax bill and homeowners insurance premium come due — typically once or twice a year — the servicer pays them directly from the escrow account on your behalf.
This arrangement protects the lender: if your property taxes go unpaid, the government can place a lien senior to the mortgage, and if your home is uninsured, the lender's collateral is unprotected. Escrow solves both risks automatically.
You may also see escrow called an impound account — common terminology used by servicers in the western United States. They refer to the same thing.
PITI: The Four Components of Your Mortgage Payment
Your full monthly housing cost is expressed as PITI. Lenders use your total PITI when calculating how much home you can afford and whether your housing expense ratio stays within guidelines.
In this example the note-rate P+I payment is $2,050/month, but the full PITI payment including escrow is $2,615/month. Borrowers who focus only on the rate payment are often surprised by the real monthly cost.
Annual Escrow Analysis
Federal law (RESPA) requires your servicer to analyze your escrow account at least once per year. The analysis compares:
- What was collected over the past 12 months
- What was actually disbursed for taxes and insurance
- What the servicer projects those costs will be next year
- The required cushion (up to 2 months of escrow payments)
After the analysis, the servicer adjusts your monthly escrow contribution. If your property taxes increased, your payment goes up. If insurance premiums dropped, it may go down slightly. You'll receive an escrow analysis statement showing the breakdown.
Escrow shortfall
An escrow shortfall occurs when the escrow account balance falls below the required minimum — usually when taxes or insurance increased more than expected. The servicer will either:
- Ask for a one-time lump sum payment to cover the shortfall immediately, or
- Spread the shortfall across your next 12 monthly payments, increasing the monthly escrow contribution
A large shortfall can raise your monthly payment by $100–$300 or more, which surprises many homeowners. When property values and tax assessments rise rapidly, shortfalls become common.
Escrow surplus
If the escrow account holds more than the required cushion after the analysis, the servicer is required to refund the surplus to you — typically by check or credit to your next payment — if the surplus exceeds $50. Smaller surpluses may be applied toward reducing next year's monthly escrow contribution.
Escrow Cushion and RESPA Rules
RESPA (the Real Estate Settlement Procedures Act) limits how large an escrow cushion a servicer can hold. The maximum cushion is 1/6 of the total annual disbursements — effectively two months' worth of taxes and insurance. Servicers cannot require you to maintain a larger balance.
Cushion example
Annual property tax: $5,100 / Annual insurance: $1,560 / Total annual disbursements: $6,660
Maximum allowable cushion: $6,660 ÷ 6 = $1,110
Monthly escrow required: ($6,660 + $1,110 cushion) ÷ 12 = $648/month
When Can You Cancel Escrow?
| Loan Type | Escrow Required? | Can Cancel When? |
|---|---|---|
| Conventional (LTV > 80%) | Yes | When LTV drops below 80% + good payment history |
| Conventional (LTV ≤ 80% at origination) | Lender may waive (often with fee) | At origination or later by request |
| FHA Loan | Yes — life of loan | Cannot cancel (requires refi to conventional) |
| VA Loan | Typically required | Some servicers allow waiver after seasoning |
| USDA Loan | Yes | Generally cannot cancel |
To request escrow waiver on a conventional loan, contact your servicer in writing. They may charge a waiver fee (commonly $500–$1,000) and will require proof of on-time payment history. Once waived, you're responsible for paying property taxes and insurance directly, often as large annual or semi-annual lump sums.
Frequently Asked Questions
What is an escrow account on a mortgage?
A mortgage escrow account is a holding account managed by your loan servicer. Each month, part of your payment (the T and I of PITI) is deposited there. The servicer pays your property tax and homeowners insurance bills from this account when they come due, so you never receive a surprise lump-sum tax bill.
What does PITI stand for?
Principal, Interest, Taxes, and Insurance. PITI represents your full monthly housing payment: the principal and interest portion goes to the loan itself, while taxes and insurance (including PMI if applicable) are collected and held in escrow. Lenders use PITI to calculate your housing expense ratio.
Why did my mortgage payment go up because of escrow?
Your servicer conducts an annual escrow analysis. If your property taxes or insurance premiums increased since last year, your required monthly escrow contribution goes up — and so does your payment. A significant tax reassessment or insurance renewal increase can raise your payment by $50–$200 or more per month. You can review the escrow analysis statement your servicer sends to see the exact cause.
Can I cancel my escrow account?
On conventional loans, many servicers allow you to waive escrow once your LTV drops below 80%, assuming good payment history and loan agreement permission. FHA loans require escrow for the life of the loan — the only way to escape it is to refinance into a conventional loan once you have 20% equity. When escrow is waived, you take on responsibility for paying taxes and insurance as large lump sums directly.
Calculate your new PITI after refinancing