Escrow (also called an impound account) is a dedicated account managed by your mortgage lender. Each month, you pay a portion of your annual property taxes and homeowners insurance into this account. When those bills come due, your lender pays them from the escrow balance.
Most mortgages require escrow for taxes and insurance, especially if you put down less than 20%. It protects the lender by ensuring property taxes get paidâsince unpaid taxes could result in liens that take priority over the mortgage.
Your escrow payment is included in your monthly mortgage payment, which is why homeowners often refer to "PITI" (Principal, Interest, Taxes, and Insurance).
Escrow creates the illusion that property taxes are fixed. Your lender handles payment automatically, so you might not notice when your taxes increaseâuntil your monthly payment jumps.
Understanding escrow helps you:
Anticipate payment changes: When property values rise and your taxes increase, your escrow payment rises too.
Spot overpayment: If your escrow account has a large surplus, you may be paying too much monthly.
Calculate appeal savings: A $1,000 annual tax reduction = roughly $83 less per month in escrow.
Your lender adjusts escrow annually. Appeal your taxes successfully, and you'll see the savings reflected in your monthly payment.
Your monthly mortgage breakdown:
Principal: $1,200
Interest: $800
Property taxes (escrowed): $750
Homeowners insurance (escrowed): $150
Total monthly payment: $2,900
Each month, $750 goes into your escrow account for taxes. When your $9,000 annual tax bill is due, your lender pays it from the accumulated escrow balance.
If your taxes increase, your monthly escrow payment increases tooâwhich is why a successful property tax appeal can lower your mortgage payment.
It depends on your loan terms. Many lenders require escrow, especially for loans with less than 20% down. Some allow you to waive escrow for a fee or higher interest rate, making you responsible for paying taxes directly.
Likely because your property taxes or insurance increased. Lenders analyze escrow accounts annually and adjust monthly payments to cover anticipated costs. Property tax appeals can prevent or reverse these increases.
Your lender will notify you and typically offer options: pay the shortage in a lump sum or spread it over the next 12 months (increasing your monthly payment). You may also be able to appeal your taxes to reduce future shortages.