Last updated: October 5, 2026
Your mortgage payment usually covers more than the loan. If you have an escrow account, part of every payment is set aside to pay your property taxes and homeowners insurance. It is convenient, but it is also why a “fixed-rate” payment can still go up. Here is how escrow works.
How an escrow account works
- At closing, you make an initial deposit into the escrow account. See closing costs explained.
- Each month, your payment includes one-twelfth of the estimated annual tax and insurance bills.
- When bills come due, your servicer pays them from the account.
- Once a year, the servicer reviews the account and adjusts your payment for the next year.
Example
Annual property tax is $4,500 and homeowners insurance is $1,800, for a total of $6,300. Your monthly escrow payment is $6,300 ÷ 12 = $525, added to your principal and interest. Federal rules generally let the servicer hold a cushion of up to one-sixth of the annual amount, here $1,050, to cover unexpected increases.
The annual escrow analysis: shortages and surpluses
If your taxes rise to $5,100 a year, the annual total becomes $6,900. Next year’s escrow payment rises to $575. If the account also came up $600 short this year, the servicer may ask you to pay the shortage at once or spread it over the next 12 months, adding another $50 a month for that year, for a temporary escrow payment of $625.
If the account has a surplus, the servicer must generally refund it to you when it is $50 or more, provided your payments are current.
Why your payment can change on a fixed-rate loan
- Property reassessments or higher local tax rates.
- Higher homeowners insurance premiums, which have risen sharply in some states.
- The end of a temporary tax exemption, such as a new-construction abatement.
- Mortgage insurance changes, for example when PMI is removed, which lowers the payment.
Can you skip escrow?
On many conventional loans, you can ask to waive escrow if you have enough equity, often 20% or more; some lenders charge a small fee or slightly higher pricing for it. FHA and VA loans generally require escrow. Without escrow, you must budget and pay large tax and insurance bills yourself on time.
Tips
- Read your annual escrow statement and check the tax and insurance amounts against your actual bills.
- Shop homeowners insurance before renewal; savings flow through to your escrow payment.
- Appeal your property tax assessment if it seems too high.
- Include tax and insurance when deciding how much house you can afford.
Our mortgage calculator includes property tax and insurance so you can see your full monthly payment.
Frequently asked questions
What is an escrow account on a mortgage?
It is an account managed by your mortgage servicer that collects part of your monthly payment to pay your property taxes and homeowners insurance (and sometimes mortgage insurance) when they are due.
Why did my mortgage payment go up if I have a fixed rate?
Most likely your property taxes or homeowners insurance increased. Your principal and interest stay the same, but the escrow portion of the payment can change after the annual escrow analysis.
How big a cushion can my servicer hold in escrow?
Federal rules generally allow a cushion of up to one-sixth of the year’s estimated escrow payments, which is about two months of escrow payments.
Can I get rid of my escrow account?
Sometimes. Many lenders allow you to waive escrow on a conventional loan with enough equity, sometimes for a fee. FHA and VA loans generally require escrow.
Sources: CFPB: What is an escrow or impound account?; CFPB Regulation X §1024.17 (escrow accounts). Example calculations by ToolStackIA.
This article is for educational purposes only and is not financial advice. Loan programs, rates and rules change; confirm details with your lender or a HUD-approved housing counselor.