Mortgage Escrow Explained: Should You Escrow Taxes and Insurance?

Your principal and interest payment is $2,000 a month, so your mortgage payment will always be $2,000, right?

Possibly, but only if we are talking about principal and interest.

Your complete monthly housing payment may also include property taxes, homeowners insurance, mortgage insurance, flood insurance, and other property-related expenses.

An escrow account is one way those bills can be collected and paid.

Some homeowners like escrow because it makes budgeting easier. Others would rather manage the money themselves.

Neither choice is automatically better, and depending on the loan, you may not have a choice.

Let’s break down what mortgage escrow actually is, how it works, and the pros and cons of escrowing versus paying the bills yourself.

First, what does “escrow” mean?

The word escrow can describe two different things during the homebuying and mortgage process.

Escrow during the purchase

During a real estate transaction, money or documents may be held by a neutral third party until certain requirements are completed.

For example, earnest money may be held in escrow while the buyer and seller work toward closing.

Escrow after closing

A mortgage escrow account, sometimes called an impound account, is different.

This is an account managed by your mortgage servicer to pay certain property-related bills on your behalf.

The servicer normally collects part of those estimated expenses with each monthly mortgage payment. When the tax or insurance bill becomes due, the servicer uses the money in the escrow account to pay it.

The Consumer Financial Protection Bureau explains that mortgage escrow accounts are commonly used to pay property taxes and homeowners insurance.

This article is primarily about that second type of escrow.

How does a mortgage escrow account work?

Let’s use a simple example.

Assume your estimated annual expenses are:

• Property taxes: $6,000
• Homeowners insurance: $2,400
• Total estimated annual expenses: $8,400

Divide $8,400 by 12 and the monthly escrow portion would be approximately $700.

If your principal and interest payment is $2,000, your estimated total payment may look like this:

The $700 is not additional interest, and it does not reduce the mortgage balance.

It is your money being collected throughout the year so the servicer can pay the property-tax and insurance bills when they become due.

Depending on the loan and property, an escrow account may also collect money for:

• Flood insurance
• Mortgage insurance
• Special assessments
• Other required property expenses

HOA dues are usually paid separately by the homeowner rather than through the mortgage escrow account.

Why is money collected for escrow at closing?

This can confuse buyers because they may see money collected for taxes and insurance at closing even though those expenses are also included in the new monthly payment.

The lender may need to establish an initial balance in the escrow account.

Taxes and insurance are not always due exactly 12 months after closing. If a large tax bill is due a few months after you purchase the home, collecting only a few monthly payments would not provide enough money to pay it.

The initial escrow deposit helps place the account on the correct schedule.

You may also pay certain expenses in advance, such as the first year of homeowners insurance. Prepaid expenses and the initial escrow deposit are related, but they are not necessarily the same charge.

Your Loan Estimate and Closing Disclosure should show how these amounts are being handled.

Why can an escrow payment change?

An escrow account is based on estimates.

Your mortgage servicer generally reviews the account through an escrow analysis, normally each year. The servicer compares what was collected with the actual bills and estimates what will be needed for the next period.

If property taxes or insurance premiums increase, the escrow portion of your payment may increase.

Escrow shortage

A shortage happens when the account does not contain enough money to cover the projected bills and required balance.

Depending on the circumstances, the homeowner may be allowed to pay the shortage in one payment or spread it across future monthly payments.

If the shortage is spread out, the payment may increase for two reasons:

1. The servicer is collecting more for the higher future bills.
2. The servicer is also collecting money to repay the previous shortage.

That combination can make the payment increase feel larger than expected.

Escrow surplus

A surplus happens when the account contains more money than the servicer is permitted to keep.

Depending on the amount and account status, the servicer may refund the excess money or apply it according to the applicable servicing rules.

An escrow refund does not necessarily mean the next payment will decrease. The upcoming tax and insurance estimates still determine the new monthly collection.

What are the advantages of escrowing?

1. Large expenses are divided into monthly amounts

Property taxes and insurance can create large bills. Escrow allows the homeowner to contribute toward those bills each month instead of saving for them separately.

For many households, that makes budgeting easier.

2. The servicer handles the payment deadlines

Your mortgage servicer is responsible for sending the escrowed payments when the bills become due.

That reduces the chance of forgetting a property-tax deadline or allowing an insurance policy to lapse.

You should still review the account and confirm that the bills are paid correctly, but you do not have to manage every deadline yourself.

3. It creates a form of forced savings

The escrow money is separated from the rest of your household funds. You are less likely to accidentally spend money that should have been saved for property taxes or insurance.

4. It may be required

Some loan programs, transactions, laws, and lender guidelines require an escrow account.

For example, FHA loans generally require escrow accounts. Certain higher-priced mortgage loans can also be subject to federal escrow requirements.

If escrow is required, the decision is no longer simply a matter of personal preference.

What are the disadvantages of escrowing?

1. Your complete payment can change

Even with a fixed interest rate, the escrow portion can increase when property taxes or insurance costs rise.

2. The estimates are not always perfect

A tax exemption may not have been applied yet. An insurance renewal may be higher than expected. A recently completed home may receive a new tax assessment.

Those changes can create shortages or surpluses.

3. You have less control over the money

The servicer holds the escrow funds until the bills are due. You generally cannot use that money for another purpose, and the account may not pay interest unless applicable law or the loan terms require it.

4. Errors can still happen

Escrow is convenient, but it is not something homeowners should completely ignore.

Insurance invoices can be sent to the wrong servicer. A tax bill can change. A loan may transfer to a new servicing company.

You should continue reviewing your insurance policy, tax records, escrow statements, and payment history.

What does it mean to waive escrow?

Waiving escrow means the mortgage servicer will not collect the applicable taxes and insurance as part of the regular monthly mortgage payment.

The homeowner becomes responsible for saving the money and paying those bills directly.

Using the earlier example, the payment sent to the mortgage company may be $2,000 instead of $2,700.

What are the advantages of not escrowing?

1. You control the money

Instead of sending the tax and insurance money to the servicer each month, you can keep it in your own account until the bills are due.

2. You can potentially earn interest

Depending on the account, you may be able to earn interest on money being saved for future tax and insurance bills.

3. You see the bills directly

Managing the bills yourself forces you to remain familiar with the property’s tax assessment, exemptions, insurance renewal premiums, coverage changes, and payment deadlines.

4. You may prefer the cash-flow flexibility

Some people have irregular or seasonal income and would rather manage the timing of the savings themselves.

That flexibility only helps if the required money is actually available when the bill arrives.

What are the disadvantages of not escrowing?

1. The bills can be large

Without escrow, you may receive a property-tax or insurance bill for several thousand dollars. If the money has not been saved, that deadline can create a serious problem.

2. You are responsible for every deadline

Missing a property-tax payment can result in penalties, interest, and potentially a tax lien.

Allowing homeowners insurance to lapse can leave you without coverage and violate the mortgage requirements.

The lender or servicer may purchase lender-placed insurance if required coverage lapses. That coverage can be more expensive and may provide less protection for the homeowner than a policy selected personally.

3. You need more financial discipline

Choosing not to escrow does not remove the expense. It transfers the responsibility for collecting and managing the money from the servicer to you.

4. An escrow waiver may not be available

The ability to waive escrow can depend on the loan program, loan-to-value ratio, lender or investor, property type, payment history, and applicable requirements.

A lender may also charge for an escrow waiver or adjust the loan’s pricing.

Do not assume that putting 20% down automatically guarantees the option to waive escrow. Requirements can vary.

Escrow versus no escrow at a glance

Which option is better?

The better option depends on the person.

Escrow may make more sense if you:

• Prefer one place to send the money
• Do not want to manage large tax and insurance deadlines
• Would rather divide the expenses across 12 months
• Are concerned that the money could accidentally be spent
• Are using a loan that requires escrow

Not escrowing may make more sense if you:

• Are highly organized with money
• Maintain strong cash reserves
• Are comfortable managing tax and insurance deadlines
• Want control over where the money is held
• Understand that a smaller mortgage payment does not mean smaller housing expenses
• Qualify for an escrow waiver on acceptable terms

For many first-time buyers, escrow provides a useful layer of simplicity.

For a homeowner with strong reserves and a reliable savings system, managing the bills independently can also work well.

Questions to ask before waiving escrow

1. Is an escrow waiver available with this loan?
2. Would waiving escrow affect my interest rate, costs, or loan approval?
3. How much would I need to pay directly for taxes and insurance?
4. When are those bills due?
5. How much should I save each month?
6. Is flood insurance or another policy also required?
7. Could I establish escrow later?
8. If I currently have escrow, what is required to cancel it?
9. Are there minimum equity or payment-history requirements?
10. Who needs proof that the bills were paid?

You should compare the complete cost and responsibility, not just the amount appearing on the monthly mortgage statement.

How should you prepare if you do not escrow?

If you choose not to escrow, create your own system before the first bill arrives.

1. Add the expected annual taxes and insurance.
2. Divide that amount by 12.
3. Transfer that amount into a separate savings account every month.
4. Review the tax assessment and insurance renewal as soon as they arrive.
5. Adjust the monthly savings amount when either expense changes.
6. Keep an additional cushion for unexpected increases.

Do not base the savings amount only on the previous owner’s tax bill.

Property ownership changes, exemptions, new construction, and reassessments can affect future taxes. Confirm the property information through the applicable county appraisal or tax authority and obtain a current insurance quote.

The bottom line

A mortgage escrow account does not make property taxes or insurance more expensive.

It changes how the money is collected and who is responsible for paying the bills.

With escrow, the servicer collects estimated amounts monthly and pays the bills when they become due.

Without escrow, you keep the money and pay those bills yourself.

Escrow offers convenience and helps divide large expenses across the year. Not escrowing offers control and flexibility, but it also requires planning, reserves, and attention to deadlines.

Most importantly, do not compare the two options by looking only at the payment sent to the mortgage company.

Your true housing expense still includes the property taxes and insurance whether they appear on the mortgage statement or arrive as separate bills.

If you are comparing loan options and are unsure whether escrow makes sense, let’s look at the complete payment together. We can review the taxes, insurance, loan requirements, and what each option would mean for your monthly budget.

No pressure. Just a clearer picture of where the money is going.

Travis Arbuckle · Mpire Financial NMLS #2488776 · Company NMLS #2108504 Clarity over pressure.

This article is for general educational purposes and is not financial, tax, insurance, or legal advice, a loan approval, or a commitment to lend. Escrow requirements, waiver availability, costs, and servicing rules vary by loan program, lender, investor, property, and applicable law.