When you buy a home, there’s more to your monthly mortgage payment than just principal and interest. A mortgage escrow account (sometimes called an impound account) is a separate account managed by your mortgage lender or servicer to pay certain property-related expenses on your behalf.  Each month, a portion of your mortgage payment is deposited into the account to cover upcoming bills such as property taxes and homeowners insurance. When those bills are due, your lender pays them directly using the funds in your escrow account–saving you time and ensuring nothing slips through the cracks.

Is an Escrow Account Always Required?

Not always. Many lenders require escrow accounts for borrowers who make less than a 20% down payment or who have government-backed loans (like FHA or USDA loans). If you have strong credit and at least 20% equity, you may have the option to waive escrow and pay taxes and insurance on your own—though this depends on your loan type and lender guidelines.

What Is Included in the Payment?

Typically, your monthly escrow contribution covers:

• Property taxes

• Homeowners insurance premiums

• Mortgage insurance (if applicable)

• Flood or hazard insurance (if required)

These payments are added to your principal and interest to form your total monthly mortgage payment.

Who Manages an Escrow Account?

Your mortgage lender or loan servicer manages the account. They collect your monthly payments, keep track of balances, and make sure bills are paid on time. 

Each year, you’ll receive an escrow analysis statement, showing how much was collected, what was paid, and whether your monthly amount will adjust due to changes in taxes or insurance premiums.

Types of Escrow Accounts

Escrow accounts aren’t just for mortgages, though that’s the most common type. Here are a few related uses:

1. Home Purchase Escrow

Used during the homebuying process, this temporary account holds earnest money or deposits from the buyer until the transaction closes. It ensures both parties meet their contractual obligations.

2. Mortgage Escrow (Ongoing)

This is the post-closing escrow account used to pay recurring costs like taxes and insurance throughout the life of the loan.

3. Construction Escrow

Used when building or renovating a home, this type of escrow account releases funds to contractors as project milestones are completed.

Pros and Cons of Having an Escrow Account

Pros:

• Simplifies homeownership with one combined payment that covers everything

• Ensures timely payment of taxes and insurance

• Protects against missed or late payments

• Helps with budgeting, spreading costs evenly across the year

Cons:

• Less control over when payments are made

• Possible overages or shortages due to tax/insurance changes

• Funds don’t earn interest (in most cases)

What Don’t Escrow Accounts Cover?

Escrow accounts do not cover:

• Utility bills (electric, water, gas, etc.)

• HOA dues or condo fees (unless specified)

• Maintenance or repairs

• Optional insurance policies (like home warranties or life insurance)
  
  

Escrow accounts are designed to make homeownership smoother—but it’s still important to review your annual escrow analysis and keep track of changing tax or insurance costs.
If you notice significant changes, reach out to your mortgage servicer to discuss your new payment amount or to adjust your budget accordingly.

Additional Need-to-Knows About Escrow Accounts

• Escrow Cushion: Lenders are allowed to keep a small “cushion” (usually up to two months of escrow payments) to cover unexpected increases.
  
  

• Refunds: If you pay off or refinance your loan, any remaining escrow balance is refunded to you within about 30 days.
  
  

• Changes Over Time: Your escrow payment may increase or decrease as property taxes or insurance premiums change annually.