Last updated April 11, 2026 by Tim Stacey, Stacey Solutions powered by Xpert Home Lending, Inc NMLS 2179191.

How a Mortgage Escrow Account Works

When you close on a home with a mortgage, your lender typically sets up an escrow account as part of the loan. Each month, your mortgage payment includes four components, often called PITI: principal, interest, taxes, and insurance. The principal and interest go toward paying down your loan. The taxes and insurance portions go into your escrow account.

Your loan servicer holds these escrow funds and pays your property tax bill and homeowners insurance premium when they come due, usually once or twice a year depending on your county and insurance policy. This system ensures that the lender’s collateral (your home) stays protected by insurance and free of tax liens, while you avoid the burden of saving up for large lump-sum payments on your own.

Think of escrow as a forced savings plan for your housing expenses. Instead of scrambling to come up with $4,000 for property taxes in December, you pay a fraction of that amount every month as part of your regular mortgage payment.

What Escrow Covers (and What It Does Not)

A standard escrow account covers property taxes and homeowners insurance. These are the two expenses that, if left unpaid, could result in a lien on the property or leave the home uninsured, both of which threaten the lender’s investment.

If you have an FHA loan, your FHA mortgage insurance premium (MIP) is also included in escrow. If your home is in a flood zone and requires flood insurance, that premium is typically escrowed as well.

Escrow does not cover maintenance costs, HOA dues, utility bills, or supplemental tax bills. These are your responsibility to pay separately. In Solano County, supplemental property taxes can come as a surprise to new homeowners, so I always give buyers a heads up about what to expect outside of their regular escrow payments.

Escrow at Closing: What to Expect

When you close on your home, the lender will collect an initial escrow deposit to fund the account. This covers a certain number of months of property taxes and insurance so there is enough money in the account when the first bills come due.

The exact amount depends on when in the year you close and when your property taxes and insurance premiums are due. Federal regulations (RESPA) limit how much a lender can require upfront, generally no more than two months of cushion beyond what is needed to cover the upcoming bills.

These initial escrow deposits are itemized on your closing disclosure so you can see exactly what you are paying and why. I walk through this section with every buyer before closing so nothing catches you off guard.

The Annual Escrow Analysis

Once a year, your loan servicer performs an escrow analysis to compare how much was collected in escrow against how much was actually paid out for taxes and insurance. If your property taxes went up or your insurance premium increased, there may be a shortage in the account. If taxes went down or you got a better insurance rate, there may be a surplus.

If there is a shortage, your servicer will adjust your monthly escrow payment upward to cover the difference. You may also have the option to pay the shortage as a lump sum to avoid the higher monthly payment. If there is a surplus above a certain threshold (typically $50), the servicer is required to refund the excess to you.

Escrow adjustments are the most common reason your mortgage payment changes from year to year, even on a fixed-rate loan. Your interest rate stays the same, but the escrow portion of your payment moves up or down based on tax and insurance changes. In Solano County, property tax reassessments after a purchase can trigger a noticeable escrow increase in the first year or two of homeownership.

Can You Waive Escrow?

Some borrowers prefer to pay their own property taxes and insurance directly rather than going through an escrow account. This is called an escrow waiver, and it is available in some situations, though not all.

To waive escrow on a conventional loan, most lenders require at least 20% equity and may charge a small fee or a slight rate increase (typically 0.125% to 0.25%). FHA and VA loans generally require escrow and do not allow waivers. Some lenders have their own policies that may be more restrictive than the loan program guidelines.

Waiving escrow gives you more control over your cash flow and lets you earn interest on the funds until the bills are due. The trade-off is that you are responsible for remembering to pay these bills on time. Missing a property tax payment can result in penalties and interest, and letting your homeowners insurance lapse can trigger force-placed insurance from your lender at a much higher cost.

For most borrowers, I recommend keeping escrow in place. The convenience and protection outweigh the minor benefit of managing the funds yourself.

Escrow and Refinancing

When you refinance your mortgage, the old escrow account is closed and any remaining balance is refunded to you by your previous servicer (usually within 30 days). Your new lender sets up a fresh escrow account and collects an initial deposit at closing, similar to when you originally purchased.

This means you may have a brief period where you receive a refund from the old escrow account while also funding the new one. Plan for this overlap in your closing cost calculations. I make sure refinance clients understand this cash flow timing so there are no surprises.

Frequently Asked Questions

Why did my mortgage payment go up if I have a fixed-rate loan?

On a fixed-rate mortgage, the principal and interest portion stays the same, but the escrow portion can change. If your property taxes or homeowners insurance premiums increased, your servicer adjusts the escrow payment to cover the higher amounts, which raises your total monthly payment.

What happens if there is an escrow shortage?

Your servicer will notify you of the shortage amount and increase your monthly escrow payment going forward. You may also have the option to pay the shortage as a lump sum to keep your monthly payment from increasing as much. The servicer will outline both options in the annual escrow analysis statement.

Can I cancel my escrow account?

Possibly, depending on your loan type and equity. Conventional loans with at least 20% equity may qualify for an escrow waiver, though the lender may charge a fee or adjust your rate. FHA and VA loans typically require escrow for the life of the loan. Contact your servicer to ask about your options.

Is the money in my escrow account earning interest?

In most states, mortgage servicers are not required to pay interest on escrow accounts. A few states have laws requiring interest on escrow funds, but California is not among them. This is one reason some borrowers prefer to waive escrow if they qualify.

How much of my mortgage payment goes to escrow?

The escrow portion varies based on your property taxes and insurance costs. As a rough example, if your annual property taxes are $4,800 and your homeowners insurance is $1,800, your monthly escrow payment would be $550 ($6,600 divided by 12). This amount is added to your principal and interest payment to create your total monthly mortgage payment.

Have Questions About Your Escrow Account?

Understanding escrow is an important part of understanding your total housing cost. Whether you are a first-time buyer trying to make sense of your monthly payment, a homeowner wondering why your payment changed, or a veteran exploring a VA loan purchase, I am happy to walk you through how escrow works for your specific situation. Reach out anytime.