What Is Escrow? A Guide for U.S. Homebuyers

Introduction

Escrow in a mortgage context refers to an account where the lender holds funds to pay property taxes and homeowner's insurance on your behalf. When you have an escrow account, part of your monthly mortgage payment goes into this account, and the lender pays these bills when they come due.

Escrow helps ensure that property taxes and insurance are paid on time, which protects both you and the lender. This guide explains how escrow works, what it pays for, and how it appears on your Loan Estimate and Closing Disclosure.

Escrow is different from mortgage insurance. For information about PMI or FHA MIP, see our What Is Mortgage Insurance? guide.

What This Means

Your total monthly mortgage payment may include: principal, interest, taxes, and insurance — often called PITI. The taxes and insurance portion may be collected through an escrow account.

The lender estimates your annual property taxes and insurance, divides by 12, and adds that amount to your monthly payment. The funds are held in escrow until the bills are due, then the lender pays them.

What Escrow Pays For

• Property taxes — Paid to your local government
• Homeowner's insurance — Protects against fire, theft, and other hazards
• Flood insurance — When required by the lender

Escrow does not pay for mortgage insurance (PMI or MIP), though those may also be part of your monthly payment.

When Is Escrow Required?

Lenders often require escrow when the down payment is less than 20% (LTV above 80%), or when the loan is backed by FHA or VA. Some conventional loans allow borrowers to pay taxes and insurance directly, but escrow is common.

Frequently Asked Questions

What is an escrow account?

An escrow account is a separate account where the lender holds funds to pay property taxes and homeowner's insurance on your behalf. Part of your monthly payment goes into escrow.

Is escrow required?

Lenders often require escrow when the down payment is less than 20%, or when the loan is backed by FHA or VA. Some conventional loans allow you to pay taxes and insurance directly.

What does escrow pay for?

Typically property taxes and homeowner's insurance (and sometimes mortgage insurance). It does not pay for the loan principal and interest.

Can my escrow payment change?

Yes. If property taxes or insurance premiums increase, the lender may adjust your escrow payment. You may receive an annual escrow analysis.