Escrow costs
Property Taxes and Escrow Explained
Escrow turns large property-tax and insurance bills into monthly pieces. It can make budgeting easier, but it also means your mortgage payment can change even when your interest rate and principal payment do not.
Quick Take
- Escrow accounts collect money for property taxes and insurance with each mortgage payment.
- The lender or servicer does not set your tax bill or insurance premium.
- Annual escrow reviews can create payment increases, shortages, or refunds.
What an escrow account does
A mortgage escrow account, sometimes called an impound account, holds monthly amounts for property taxes and homeowners insurance. The servicer then pays those bills when they come due.
Many lenders require escrow because unpaid property taxes can create liens and unpaid insurance can leave the collateral exposed.
Why your payment can change
Principal and interest may stay fixed on a fixed-rate loan, but taxes and insurance rarely stay still. If the county raises the assessed tax bill or the insurer increases premiums, the escrow part of the payment can rise.
Servicers usually run an annual escrow analysis. If they collected too little, you may have a shortage and a higher payment. If they collected too much, you may receive a refund or credit.
How to estimate taxes before buying
Use the local tax rate as a starting point, but check how reassessment works after a sale. A seller's current tax bill may not match the buyer's future bill.
For a practical payment estimate, model taxes as an annual percentage of the purchase price, then divide by 12. Replace that assumption with county-specific information as soon as you have it.
How escrow affects closing
Closing costs may include an initial escrow deposit so the account has enough money for upcoming tax and insurance bills. That deposit is separate from lender fees and prepaid interest.
If the seller already paid taxes for part of the year, the closing statement may include prorations or adjustments so each party pays the appropriate share.
Run the numbers