JagInsights › Glossary › Escrow
What is an escrow account on a mortgage?
A mortgage escrow account holds money for property tax and homeowners insurance so those bills are paid when they come due.
An escrow account attached to a mortgage is a holding pocket. Each month you pay a slice of next year's property tax and homeowners insurance. The servicer pays those bills from the pocket when they are due.
Worked example
Principal and interest are $1,700. Tax and insurance for the year are $4,800, which is $400 a month. The payment you actually send is about $2,100, not $1,700. When tax goes up, the servicer can raise the monthly amount after an escrow analysis.
Why it matters
People shop mortgages on principal and interest, then the first statement includes escrow and the payment is not the number they used in the budget.
Questions people ask
Can I pay tax and insurance myself?
Some loans allow it once equity is large enough. Many do not in the first years. The loan documents control this.
What is an escrow shortage?
When the pocket does not have enough for the next bills, the servicer can ask for a lump sum, a higher monthly amount, or both.
Is closing-cost escrow the same thing?
At closing you often seed the pocket with a few months of tax and insurance. That cash-to-close is separate from the down payment.
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