What is an escrow account? Do I have one?

August 10, 2022

An escrow account is how your mortgage lender ensures that your property taxes and insurance are paid on time.


If you have a mortgage, you likely have a mortgage escrow account.

Look on a recent statement or bill. If there’s a line or section for “escrow,” part of your monthly payments have been going into your mortgage escrow account.


What is a mortgage escrow account?

It’s an account maintained by your lender to collect funds from you in order to pay the taxes and property insurance due on your home.


Why is a mortgage escrow account needed?

Like you, your lender has a vested interest in your property. As a condition of your mortgage, you agreed to maintain sufficient hazard insurance coverage. If your home gets damaged or destroyed, the hazard insurance will allow the bank to rebuild the home and then either continue with the scheduled mortgage payments or sell it to recoup the outstanding mortgage balance. An escrow account is a way for a bank to ensure that obligations such as taxes and insurance are paid on a timely basis.


Paying your mortgage: Do you have to have an escrow account?

Some lenders will allow you to pay your taxes and insurance on your own. But some loans, such as those guaranteed by the Federal Housing Administration (FHA), require you to establish a mortgage escrow account for these expenses.

Banks often use a loan-to-value (LTV) ratio to determine whether your loan will require an escrow account. This is the ratio of how much you still owe on your home to the appraised value of your home. If your LTV is over 80 percent, some lenders might require an escrow account. If it’s less, they could waive the requirement.


How does a mortgage escrow account work?

If your lender requires a mortgage escrow account, they will calculate how much you’ll need to pay for insurance and taxes each year and divide it by 12 months. That amount is added to the mortgage payment you make each month.

With each mortgage payment you make, the lender deposits the escrow portion of the payment into the escrow account and makes the insurance and tax payments on your behalf from that account as they come due.

You may also be obligated to pay an “escrow cushion.” An escrow cushion consists of funds the lender requires you to pay into the escrow account so that if the taxes or insurance are higher than estimated, the cost is covered. Typically, on a refinance, the cushion is usually around 6 months, which depends on when the payments are due.


What is an escrow overage?

Annually, your lender will perform an examination of your escrow account to make sure it is collecting the correct amount of money for the anticipated expenditures on your taxes and insurance. This analysis determines if there may be an overage, meaning that your escrow account is projected to have more than the minimum balance required at its lowest point in a 12-month period.

If an overage is projected, an adjustment in your monthly payment will be made and, provided the overage is over $50, you will receive a reimbursement check. If the overage is less than $50, your monthly payment will be prorated.


What is an escrow shortage?

A shortage means your escrow account has insufficient funds than are required to make all the necessary payments. This is common when there is an unanticipated increase in your property taxes or insurance.

Another instance where a shortage may take place is when a tax payment is owed by the 15th of the month, so the disbursement occurs a month earlier than anticipated to avoid the possibility of a late fee. An earlier disbursement may also occur if the taxing authority provides a discount for early payments.

Lastly, if there is a change in insurance companies during the 12-month escrow cycle, that change may cause an earlier disbursement date than previously projected.


What happens when there is a shortage?

If a shortage occurs, it will be divided by 12 months and added to the mortgage payment unless paid in full by the borrower prior to the payment change date.


If you pay the shortage in full, will your monthly payments still increase?

Typically, yes. To avoid the same shortage from occurring over the next 12 months, your new monthly escrow deposit will be calculated on 1/12th of the current tax and insurance payments in addition to the escrow cushion.


Why do I have an increase in my monthly payment?

If your taxes or insurance went up in the previous year, the escrow portion of your payment is likely to go up as well when you’re paying your mortgage. Please remember that your monthly escrow deposit is calculated on 1/12th of your current tax and insurance payments to determine your new monthly payment, regardless of your escrow account balance. The escrow cushion is also part of this payment.


Learn more about escrow and how it works within the home-buying process at U.S. Bank. 

Related content

Tips and tools for tax season and beyond

Key components of a financial plan

Saving for a down payment: Where should I keep my money?

What you need to know about renting

The essential business tips for tax deductions

7 things to know about long-term care insurance

What is Medicare? Understanding your coverage options

How much life insurance do I need?

Healthcare costs in retirement: Are you prepared?

Is your employer long term disability insurance enough?

Annual insurance review checklist

Rebuilding finances after a natural disaster

Why other lenders may be reaching out to your employees

Dear Money Mentor: When should I refinance a mortgage?

Should you buy a house that’s still under construction?

Tips for navigating a medical hardship when you’re unable to work

How I did it: Turned my side hustle into a full-time job

Adulting 101: How to make a budget plan

Maximizing your deductions: Section 179 and Bonus Depreciation

Resources for managing financial matters after an unexpected death

Don’t underestimate the importance of balancing your checking account

Starting your homebuying journey: Tips from a U.S. Bank Goals Coach

Overcoming high interest rates: Getting your homeownership goals back on track

How to be prepared for tax season as a gig worker

Avoiding the pitfalls of warehouse lending

Building a dream home that fits your life

A guide to tax diversification and investing

Comparing term vs. permanent life insurance

6 questions to ask before buying a new home

What kind of life insurance is right for me?

Webinar: Mortgage basics: How much house can you afford?

These small home improvement projects offer big returns on investment

8 steps to choosing a health insurance plan

Make your business legit

What is a home equity line of credit (HELOC) and what can it be used for?

Is it the right time to refinance your mortgage?

9 simple ways to save

5 things to avoid that can devalue your home

3 types of insurance you shouldn’t ignore

Managing the impacts of appraisal gaps in a hot housing market

Is it cheaper to build or buy a house

What are conforming loan limits and why are they increasing

A checklist for starting a mobility program review

The connection between your health and financial well-being

How to Adult: 7 tax terms and concepts you should know

How I did it: My house remodel

How do I prequalify for a mortgage?

8 steps to take before you buy a home

Your guide to breaking the rental cycle

4 ways to free up your budget (and your life) with a smaller home

Get more home for your money with these tips

First-time homebuyer’s guide to getting a mortgage

Home buying myths: Realities of owning a home

7 beneficiary designation mistakes to avoid

7 year-end tax planning tips

Should I itemize my taxes?

Money Moments: How to finance a home addition

Is it time to get a shared bank account with your partner?

For today's homebuyers, time and money are everything

Here’s how to create a budget for yourself

How to use debt to build wealth

Housing market trends and relocation impact

High-cost housing and down payment options in relocation

For today's relocating home buyers, time and money are everything

Crypto + Relo: Mobility industry impacts

Financial steps to take after the death of a spouse

Checklist: financial recovery after a natural disaster

How I did it: Bought a home without a 20 percent down payment

House Hacks: How buying an investment property worked as my first home

The lowdown on 6 myths about buying a home

Multiple accounts can make it easier to follow a monthly budget

You can take these 18 budgeting tips straight to the bank

How I did it: Learned to budget as a single mom

What’s a subordination agreement, and why does it matter?

What is an escrow account? Do I have one?

Understanding the true cost of borrowing: What is amortization, and why does it matter?

Money Moments: Tips for selling your home

Which is better: Combining bank accounts before marriage — or after?

Do you and your fiancé have compatible financial goals?

What types of credit scores qualify for a mortgage?

Should you get a home equity loan or a home equity line of credit?

Quiz: How prepared are you to buy a home?

Checklist: 10 questions to ask your home inspector

7 steps: How couples and single parents can prepare for child care costs

How to save for a wedding

It's possible: 7 tips for breaking the spending cycle

Personal finance for teens can empower your child

Save time and money with automatic bill pay

How I did it: Bought my dream home using equity

Buying a home Q&A: What made three homeowners fall in love with their new home

How I did it: Built living spaces to support my family

Spring cleaning checklist for your home: 5 budget-boosting tasks

Checklist: 6 to-dos for after a move

Webinar: Uncover the cost: Building a home

Are professional movers worth the cost?

10 questions to ask when hiring a contractor

How you can take advantage of low mortgage rates

4 questions to ask before you buy an investment property

10 ways to increase your home’s curb appeal

Webinar: Uncover the cost: Home renovation

Is a home equity line of credit (HELOC) right for you?

10 uses for a home equity loan

Preparing for homeownership: A guide for LGBTQ+ homebuyers

Beyond the mortgage: Other costs for homeowners

How to use your home equity to finance home improvements

What to know when buying a home with your significant other

Webinar: Mortgage basics: What’s the difference between interest rate and annual percentage rate?

Webinar: Mortgage basics: Buying or renting – What’s right for you?

Webinar: Mortgage basics: What is refinancing, and is it right for you?

Webinar: Mortgage basics: Prequalification or pre-approval – What do I need?

Webinar: Mortgage basics: How does your credit score impact the homebuying experience?

Webinar: Mortgage basics: Finding the right home loan for you

Webinar: Mortgage basics: 3 Key steps in the homebuying process

What is refinancing a mortgage?

Home equity: Small ways to improve the value of your home

Closing on a house checklist for buyers

What documents do you need after a loved one dies?

How to prepare for a natural disaster

5 things to know before accepting a first job offer

Recognize. React. Report. Caregivers can help protect against financial exploitation

Is online banking safe?

Know your debt-to-income ratio

Your quick guide to loans and obtaining credit

Test your loan savvy

6 essential credit report terms to know

Crypto + Homebuying: Impacts on the real estate market

Can you take advantage of the dead equity in your home?

Costs to consider when starting a business

Investing in capital expenditures: What to discuss with key partners

Start of disclosure content

Loan approval is subject to credit approval and program guidelines. Not all loan programs are available in all states for all loan amounts. Interest rate and program terms are subject to change without notice. Mortgage, home equity and credit products are offered by U.S. Bank National Association. Deposit products are offered by U.S. Bank National Association. Member FDIC.