An escrow account is the reason your monthly mortgage bill is higher than the principal and interest figure you saw in an ad. Your servicer adds one-twelfth of your annual property tax and homeowners insurance to each payment, holds that money, and pays the bills for you when they come due. On a $400,000 Virginia home, that can add roughly $440 a month. Understanding how escrow accounts work on a mortgage also explains why the payment can rise even when your interest rate is fixed.
The money is yours, it is not a fee, and in many cases you can avoid the account entirely. Below: what the account covers, how the monthly amount is set, a full worked example, why it changes, and when you can pay these bills yourself.
What Goes Into the Account and Who Controls It
The mortgage industry measures a payment in four parts, shortened to PITI: principal, interest, taxes, and insurance. Principal and interest repay the loan. Taxes and insurance are the escrowed portion. Every escrow account holds property taxes and homeowners insurance. Depending on your loan and property, it may also hold flood insurance, FHA mortgage insurance premiums, conventional private mortgage insurance (PMI), and certain HOA-related items. Those last items appear only where they apply, and some mortgage insurance is simply built into the monthly payment alongside escrow.
The servicer holds the money and pays the bills on their due dates. The servicer is the company that collects your payments and manages the loan, and it can differ from the company that arranged the loan. Loans are frequently sold or transferred, so the servicer you have in year three may not be the one that sent your first statement. A mortgage broker like Duane Buziak places your loan with an investor; the broker does not hold your escrow funds.
Two Different Things Called “Escrow”
The word covers two separate arrangements, and mixing them up causes a lot of confusion:
- Closing escrow: a title or settlement agent holds the earnest money and closing funds during the sale, then releases them at closing. It ends when you get the keys.
- Mortgage escrow: the ongoing account your servicer runs for the life of the loan, or until you remove it.
What Escrow Is Not
It is not an extra fee. The servicer does not keep it as profit; it passes it to your county and your insurer. It is also not a savings account that earns you returns, since many accounts pay no interest, though a few states require it. And the amount is not fixed. It is an estimate that gets rechecked every year, which is the subject of the next two sections. The CFPB’s explainer on escrow accounts covers the basics in plain terms.
How the Monthly Escrow Amount Is Calculated
The math starts simply. The servicer estimates the year’s property taxes and insurance premiums, adds them together, and divides by 12. That result is the escrow portion of every monthly payment. If taxes are $3,480 and insurance is $1,800, the annual total is $5,280 and the monthly escrow is $440.
The Cushion
Servicers are allowed to keep a buffer so a small bill increase does not leave the account short. Under RESPA and Regulation X, the cushion cannot exceed one-sixth of the estimated annual disbursements, which equals two months of escrow payments. The rule is set out in Regulation X, 12 CFR 1024.17. It is a maximum, not a requirement, and your loan documents or state law may call for less.
The Initial Deposit at Closing
To start the account at the right level, you fund an initial deposit at closing. It typically covers several months of taxes and insurance, depending on when the next bills are due. You will find it on your Closing Disclosure: page 1 shows the estimated monthly escrow under Projected Payments, and page 2, Section G, lists the initial escrow payment at closing. Your first full year of homeowners insurance is usually paid at closing as a separate line, so do not confuse it with this deposit. Ask for the Closing Disclosure early and compare these lines with your Loan Estimate.
The Annual Escrow Analysis
Once a year the servicer compares what it actually paid with what it projected, recalculates the coming year, and mails you an escrow account statement. That statement is the single most useful document for understanding your payment. It shows your new monthly amount, the projected low point of the account, and whether you have a shortage or surplus.
Worked Example: A $400,000 Home in Virginia
This is an illustration, not a rate quote. Suppose you buy a $400,000 home in Henrico County, put 20% down ($80,000), and borrow $320,000 on a 30-year fixed loan at an illustrative 6.50%.
Principal and interest. The monthly rate is 0.065 divided by 12, or 0.0054167. Using the standard amortization formula, the payment factor over 360 months is about 0.0063207. Multiply that by $320,000 and P&I is $2,022.62.
Property tax. As of 2026, Henrico County’s real estate rate has been about $0.87 per $100 of assessed value, which you should confirm on the Henrico County website since rates are set annually. At an assessed value of $400,000, tax is $3,480 a year, or $290 a month.
Insurance. Assume a $1,800 annual homeowners premium, or $150 a month.
Monthly escrow is $440, so full PITI is $2,462.62. The escrow slice is nearly 18% of the payment, which is why a P&I-only advertisement understates what you will actually pay by more than $400.
The Account Over Time
Each month $440 goes in. When a tax installment or the insurance renewal comes due, the servicer pays it and the balance drops. The servicer sizes the deposits so that the lowest point in the year stays near the cushion, which here is at most $880 (two months of $440).
The First Annual Analysis
Suppose the county reassesses upward and your insurer raises the premium. Tax becomes $3,654 (up 5%) and insurance $2,000, so actual bills are $5,654 against $5,280 projected. That leaves an illustrative shortage of $374. The new base escrow is $5,654 divided by 12, or $471.17. Spreading the $374 shortage over 12 months adds $31.17, so escrow becomes $502.34 and PITI becomes $2,524.96. After the shortage is cleared, the escrow portion falls back to about $471.17, making PITI $2,493.79. Your interest rate never moved, yet the payment rose by over $60.
Why Your Escrow Payment Changes
Because P&I is fixed on a fixed-rate loan, nearly every payment change comes from the escrow side. The usual causes:
- Tax reassessment: the county raises your assessed value or the tax rate.
- Insurance increases: premiums renew higher, which has been common in many areas in recent years.
- Coverage changes: you add flood coverage or raise your dwelling limit.
- Mortgage insurance changes: PMI drops off a conventional loan once you reach the required equity, lowering the payment.
Shortage, Deficiency, and Surplus
A shortage means the account will not hold enough to meet the cushion; a deficiency means the balance has actually gone negative because the servicer advanced money. Regulation X limits how fast a servicer can demand repayment, and the allowed method depends on the size of the gap relative to your monthly escrow amount. Servicers commonly offer either a lump-sum payment or spreading the amount over 12 months. Read the exact options on your statement and check them against the current text of 12 CFR 1024.17.
A surplus works the other way. If the analysis shows an overage of $50 or more, federal rules generally require the servicer to refund it within 30 days, provided your loan is current. Smaller surpluses can be refunded or credited against next year’s payments.
What to Do When the Payment Jumps
- Open the annual escrow statement and find which bill changed.
- Compare that line to your prior-year tax bill and insurance declarations page.
- Shop your homeowners insurance; a lower premium lowers the next analysis.
- If your assessment looks too high, find out whether your county allows an appeal and what the deadline is.
- If you suspect a servicer error, send a written request for information; the CFPB describes how on its site.
Escrow vs. Paying Taxes and Insurance Yourself
Whether you have a choice depends on the loan type and your down payment. Requirements shift with investor guidelines, so treat the following as general rules and confirm with your loan documents.
- FHA: escrow for taxes and insurance is generally required. See HUD’s Single Family Housing Policy Handbook 4000.1. Waiver possibility: rarely. Notes: FHA mortgage insurance premium is also collected monthly.
- VA: most VA loans are set up with escrow, and the program’s rules are explained at VA.gov Home Loans. Waiver possibility: depends on the investor and servicer. Notes: no monthly mortgage insurance, so escrow covers only taxes, insurance, and any applicable items.
- Conventional, under 20% down: escrow is typically required. Waiver possibility: uncommon. Notes: PMI is part of the payment until you reach the required equity.
- Conventional, 20% or more down: escrow is often optional under guidance in Fannie Mae’s Selling Guide. Waiver possibility: often available. Notes: some investors charge a waiver fee or apply a small pricing adjustment, which varies by program.
Separately, federal rules require an escrow account for at least the first five years on higher-priced mortgage loans, which are loans priced well above average market rates. That requirement applies regardless of down payment.
The Trade-offs
Escrow gives you predictability: no $1,740 tax bill landing in one month and no risk of a lapsed insurance policy. Paying yourself gives you control over cash. If you keep that money in a high-yield savings account until the bill is due, you keep the interest. The catch is discipline. Missing a tax payment can lead to penalties or a lien, and an insurance lapse can cause the servicer to buy expensive force-placed coverage. Many borrowers who qualify to waive escrow keep it anyway because of the convenience.
Escrow Questions to Ask Before You Choose a Mortgage
Duane Buziak compares options from hundreds of loan providers at once, and the escrow terms are one place where they differ. Waiver conditions, initial deposit amounts, and servicing-transfer practices vary by program and investor. Ask for each answer in writing, not on a phone call you will not remember.
Use a soft credit pull mortgage pre-approval to get real quotes side by side. With a no credit hit mortgage application, such as the NoTouch Credit Pull, you can review escrow terms across several options without a hard inquiry, so shopping does not cost you score points. A mortgage pre approval without hard pull still gives you actual figures to compare.
Questions to put to every option:
- Is this loan likely to be sold, and will servicing transfer? To whom, and when would I be notified?
- What escrow cushion will the servicer hold, and what is the estimated initial deposit at closing?
- Can escrow be waived on this program, and what does the waiver cost in fees or pricing?
- How and when can I request that escrow be removed later?
Servicing matters because large national retail companies, including names like Rocket and Movement, often service loans they originate, though practices vary by loan and are disclosed in your servicing disclosure. A broker places your loan with an investor chosen for your situation, and you should confirm who will service it before closing.
One clarification, since some people searching for “Ally” end up here: The Mortgage Ally by Duane Buziak is an independent mortgage broker and is not affiliated with Ally Bank. The name is similar, but the businesses are separate.
Escrow Is Just Your Own Bills, Paid Monthly
Strip away the terminology and an escrow account is your property tax and homeowners insurance, collected in twelve pieces instead of one or two large ones. The amount will move as your assessment and premiums move, so read each annual statement and act when something looks off. Before you commit to a loan, get the escrow terms in writing.
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