When you’re buying a home, you’ll probably hear the word escrow several times during the mortgage process.

The confusing part is that people can actually be talking about different things when they use that word.

There’s escrow associated with the purchase transaction, and then there’s the mortgage escrow account your lender may use after closing to collect money for property taxes and homeowners insurance.

This guide is about the second one.

If your mortgage includes an escrow account, a portion of your monthly payment is collected by your mortgage servicer and held so certain property-related bills can be paid when they come due.

That sounds relatively simple.

But escrow accounts generate a lot of questions from homeowners:

Why did my mortgage payment increase if I have a fixed interest rate?

Why am I paying several months of taxes and insurance at closing?

What is an escrow shortage?

Can I remove escrow from my mortgage?

What happens if my property taxes increase?

Understanding how escrow works can make both your closing costs and your future mortgage payment much easier to understand.

You can also explore our Mortgage Resource Center for more information about the homebuying and mortgage process.

What Is a Mortgage Escrow Account?

A mortgage escrow account is an account maintained by your mortgage servicer to help pay certain expenses associated with your home.

The two most common expenses are:

• Property taxes
• Homeowners insurance

Depending on the property and loan, other items may sometimes be included as well.

Instead of receiving a large property-tax bill and paying it entirely out of pocket when it’s due, you generally pay a portion toward those expenses each month as part of your mortgage payment.

Your mortgage servicer collects the money and then uses the escrow account to pay the applicable bills when they become due.

What Does Escrow Mean on a Mortgage Payment?

Let’s use a simplified example.

Suppose your annual property taxes are:

$4,800 per year

And your homeowners insurance costs:

$1,800 per year

Together, that’s:

$6,600 per year

Divide that by 12 months and approximately $550 per month would need to be collected for those two expenses.

So your monthly mortgage payment might look something like this:

Principal and interest: $1,650
Property taxes: $400
Homeowners insurance: $150
Total payment: $2,200

The $550 for taxes and insurance isn’t additional interest being charged by the lender.

It’s money being collected so those bills can be paid later.

This is why it’s important to understand the difference between your principal and interest payment and your total monthly mortgage payment.

What Does PITI Mean?

You may hear your lender use the term PITI when discussing your mortgage payment.

PITI generally stands for:

P = Principal
I = Interest
T = Taxes
I = Insurance

Principal and interest are the actual loan payment.

Taxes and insurance are expenses associated with owning the property that may be collected through escrow.

Depending on the property and mortgage, your total housing expense can include additional costs as well, such as mortgage insurance or homeowners association dues.

That’s why looking only at principal and interest doesn’t always tell you what owning the home will actually cost each month.

Is an Escrow Account the Same as Your Mortgage?

No.

The escrow account is associated with the mortgage, but the money in escrow isn’t being used to pay down your loan balance.

Think of your mortgage payment as potentially containing different buckets.

One portion pays principal.

One portion pays interest.

Another portion may be collected for property taxes.

Another portion may be collected for homeowners insurance.

Your servicer then manages the escrowed funds and pays the appropriate bills when they’re due.

Why Do Mortgage Lenders Use Escrow Accounts?

Property taxes and homeowners insurance are important to both the homeowner and the lender.

If property taxes aren’t paid, the property can potentially become subject to tax liens or other collection actions.

If homeowners insurance lapses and the property suffers significant damage, both the homeowner and lender have an interest in ensuring the property is adequately insured.

An escrow account helps make sure money is being set aside throughout the year for these expenses.

It also allows the homeowner to spread large annual or semiannual expenses across monthly mortgage payments rather than having to budget for the entire bill separately.

For many homeowners, that’s convenient.

Instead of needing several thousand dollars when a tax bill arrives, you’ve effectively been saving toward the bill every month.

Are Property Taxes Included in Your Mortgage Payment?

If your loan has an escrow account, generally yes, property taxes will be collected as part of your monthly payment.

But this creates an important misconception.

Your mortgage lender doesn’t determine how much your property taxes are.

The applicable taxing authorities do.

Your mortgage servicer is generally collecting the money and paying the bill on your behalf.

So if your property taxes increase, your mortgage payment can increase even if you have a fixed-rate mortgage.

We’ll get much deeper into that later because it’s one of the most common sources of confusion for homeowners.

Is Homeowners Insurance Included in Your Mortgage Payment?

If your homeowners insurance is escrowed, the mortgage servicer generally collects a portion of the expected insurance cost each month and pays the insurance premium when it’s due.

Again, the lender doesn’t determine the price of your homeowners insurance.

Your insurance premium is determined by the insurance company.

If your insurance premium changes, the amount needed in your escrow account can change too.

That can ultimately affect your total mortgage payment.

Why Do You Pay Into Escrow at Closing?

This is one of the areas that surprises first-time homebuyers.

You may look at your Loan Estimate or closing figures and see money being collected for property taxes and homeowners insurance even though you haven’t made your first mortgage payment yet.

Why?

Because the mortgage servicer needs enough money in the escrow account to pay upcoming bills when they’re due.

The exact amount collected depends on several factors, including:

• When you’re closing
• When property taxes are due
• When the homeowners insurance premium is due
• The estimated tax and insurance amounts
• The timing of your first mortgage payment
• Applicable escrow requirements

That’s why two people purchasing similarly priced homes can have different initial escrow deposits.

The closing date alone can make a difference.

Initial Escrow Deposit vs. Prepaid Expenses

Another area that causes confusion is the difference between an initial escrow deposit and prepaid expenses.

They can appear near each other on your closing documents, but they aren’t necessarily the same thing.

For example, you may need to pay the first year of homeowners insurance before or at closing.

That’s a prepaid expense.

At the same time, additional money may be collected to establish the escrow account that will be used for future insurance and property-tax payments.

You may also see prepaid mortgage interest covering the period between your closing date and the end of that month.

Understanding these categories is one reason it’s useful to know how to read a Loan Estimate instead of looking only at the final cash-to-close number.

Why Can Escrow Make Closing Costs Look Higher?

Some homebuyers see the amount due at closing and assume every dollar is a fee being charged by the lender.

It isn’t.

Your total cash required at closing can include several different categories:

• Down payment
• Lender costs
• Third-party closing costs
• Prepaid expenses
• Initial escrow deposits

Money placed into your escrow account is fundamentally different from an underwriting or appraisal fee.

It’s being collected for future expenses associated with your property.

This distinction is important when comparing mortgage offers.

If one Loan Estimate shows a larger initial escrow deposit than another, that doesn’t automatically mean the lender is more expensive.

You need to compare the actual lender charges, third-party costs, prepaid items and escrow amounts correctly.

What Is an Escrow Cushion?

Mortgage servicers may maintain an additional amount in the escrow account beyond the exact projected amount needed for upcoming bills, subject to applicable limits.

This is commonly called an escrow cushion.

The reason is straightforward.

Property taxes and homeowners insurance don’t necessarily remain exactly the same every year.

A cushion can help account for changes in those expenses and the timing of when bills must be paid.

However, servicers can’t simply keep an unlimited amount of extra money in your escrow account. Federal mortgage servicing rules place limits on how escrow accounts are calculated and maintained.

Does Escrow Earn Interest?

For many mortgage escrow accounts, you should not assume the money will earn interest for you.

Whether interest must be paid on escrowed funds can depend on applicable state law and the specific circumstances.

For most borrowers, the primary purpose of the escrow account isn’t investment growth.

It’s budgeting and payment of property-related expenses.

Who Actually Pays the Property Tax and Insurance Bills?

If those expenses are escrowed, your mortgage servicer generally handles the payment.

That doesn’t mean you should completely ignore the bills.

It’s still a good idea to review property-tax notices and insurance documents when you receive them.

Mistakes can happen.

Insurance premiums can change.

Property taxes can change.

And you should understand what is being charged against your escrow account.

You own the home, so even though the servicer may be making the payment, you should still pay attention to what’s happening.

Escrow Makes Your Mortgage Payment Easier to Understand Once You Know the Pieces

The biggest thing to remember is this:

Your mortgage payment isn’t always just your mortgage.

Principal and interest relate directly to the loan.

Property taxes and homeowners insurance are separate homeownership expenses that may be collected alongside the loan payment through escrow.

Once you separate those pieces, a lot of mortgage-payment questions become much easier to answer.

And it sets up an even bigger question:

If you have a fixed-rate mortgage, why can your payment still go up?

That’s where escrow shortages, annual escrow analyses, changing property taxes and insurance premiums come into play.

Why Can Your Mortgage Payment Increase if You Have a Fixed Rate?

This is probably the most common escrow question homeowners ask.

If you have a fixed-rate mortgage, the principal and interest portion of your payment generally doesn’t change because your interest rate is fixed.

But your total mortgage payment can still change.

Why?

Because property taxes and homeowners insurance can change.

If either expense increases and you’re using an escrow account, your mortgage servicer needs to collect enough money to pay the higher bills.

For example, suppose your payment originally looked like this:

Principal and interest: $1,650
Property taxes: $400
Homeowners insurance: $150
Total payment: $2,200

A year later, your taxes increase to $450 per month and your insurance increases to $175.

Your principal and interest are still $1,650.

But your total payment may now be approximately:

Principal and interest: $1,650
Property taxes: $450
Homeowners insurance: $175
Total payment: $2,275

Your mortgage rate didn’t change.

The expenses being collected through escrow did.

What Is an Escrow Analysis?

Mortgage servicers periodically review escrow accounts to determine whether the amount being collected is expected to cover upcoming expenses.

This is commonly called an escrow analysis.

The servicer looks at things such as:

• Current escrow balance
• Expected property-tax bills
• Expected homeowners insurance premiums
• Scheduled payment dates
• Projected monthly escrow deposits
• Any applicable escrow cushion
• Whether the account is projected to have a shortage or surplus

After the analysis, you’ll typically receive an escrow statement explaining the calculation and whether your monthly payment is changing.

Don’t throw this letter away.

If your mortgage payment is about to increase, the escrow analysis can usually help explain why.

What Is an Escrow Shortage?

An escrow shortage occurs when the amount projected to be in your escrow account is less than the amount required under the servicer’s escrow calculation.

This can happen for several reasons.

For example:

You purchased the home when the annual property taxes were $4,800.

The servicer collected approximately $400 per month toward taxes.

Later, the annual tax obligation increases to $5,400.

The account now needs approximately $450 per month for taxes.

If the previous escrow calculation was based on the lower amount, the account may not have collected enough money to support the new expense.

That can create a shortage.

Homeowners insurance increases can create the same problem.

Does an Escrow Shortage Mean You Missed a Payment?

No.

This is important.

You can make every mortgage payment on time and still have an escrow shortage.

A shortage doesn’t necessarily mean you did anything wrong.

It may simply mean the expenses being paid from the account increased beyond what was previously projected.

How Do You Pay an Escrow Shortage?

Depending on the circumstances and applicable servicing rules, you may be given options for addressing the shortage.

One common approach is spreading the shortage across future monthly payments.

For example, suppose your escrow account has a $1,200 shortage.

If that amount is spread across 12 months, that could add approximately:

$100 per month

But there’s another piece homeowners sometimes miss.

The servicer may also need to increase the regular monthly escrow collection because the underlying taxes or insurance are now higher.

Suppose your new taxes and insurance require an additional $75 per month.

Your payment could temporarily increase by approximately:

$100 shortage repayment + $75 higher ongoing escrow = $175 per month

That can make the payment increase look much larger than the actual annual increase in taxes or insurance.

Why Did My Mortgage Payment Jump So Much?

This is often the reason.

Your payment may be adjusting for two things at the same time:

1. Repaying an existing escrow shortage
2. Collecting enough money for the higher future expense

Using our example, the homeowner might see a $175 monthly increase and think:

“My property taxes went up $2,100 this year?”

Not necessarily.

Part of that increase may be temporary repayment of the previous shortage.

Once the shortage has been satisfied, that portion of the payment may no longer be necessary, although the higher ongoing tax or insurance amount may remain.

That’s why you should look at the escrow analysis rather than judging the change solely from the new monthly payment.

Can You Pay an Escrow Shortage in a Lump Sum?

Sometimes you may be given the option to pay an escrow shortage in a lump sum rather than spreading it across future payments.

Whether that makes sense depends on your financial situation.

Paying the shortage immediately may reduce the size of the monthly payment increase, but it doesn’t necessarily eliminate the underlying increase in taxes or insurance.

For example:

If taxes permanently increased by $600 per year, paying an existing shortage won’t make that $600 annual increase disappear.

The servicer will still need to collect approximately another $50 per month going forward.

So before paying a shortage in full, understand how much of your payment increase comes from:

The shortage itself

versus

The new ongoing escrow requirement.

What Is an Escrow Surplus?

The opposite can also happen.

If the escrow analysis determines that the account contains more money than required under applicable rules, you may have an escrow surplus.

Depending on the amount and status of the account, the servicer may be required to refund qualifying surplus funds to you.

This sometimes happens when projected expenses end up being lower than anticipated.

But don’t automatically assume a refund means your property taxes or insurance decreased permanently.

Review the escrow analysis to understand why the surplus occurred and what the new monthly escrow amount will be.

Why Do Property Taxes Increase After Buying a Home in Michigan?

This is particularly important for Michigan homebuyers.

The property taxes the previous homeowner was paying aren’t always a reliable indication of what you will eventually pay after purchasing the property.

Michigan property taxes involve both taxable value and state equalized value, and ownership changes can affect how taxable value is calculated.

A property that has been owned by the same person for many years may have a taxable value significantly below its current market-related value because annual increases in taxable value are generally limited while that owner holds the property.

After a transfer of ownership, the property’s taxable value can be uncapped for the following tax year, subject to Michigan’s property-tax rules.

That means a buyer can purchase a home and later experience a meaningful property-tax increase.

If those taxes are escrowed, the mortgage payment can then increase.

Don’t Estimate Your Future Michigan Property Taxes From the Seller’s Current Tax Bill

This deserves its own section because it can create a nasty surprise.

Suppose you’re looking at a home and the seller’s current property taxes are $4,000 per year.

It may be tempting to assume:

“Great. My taxes will be about $333 per month.”

Not necessarily.

If the property’s taxable value changes after the transfer of ownership, your future tax bill may be different.

That’s why Michigan homebuyers should be careful when estimating their future housing payment.

A good mortgage pre-approval should account for realistic property-tax expectations rather than simply assuming the seller’s current bill will continue indefinitely.

Can New Construction Property Taxes Change Dramatically?

Yes, and this is another situation where buyers should pay close attention.

A newly built home may initially have property taxes based largely on the land because the completed house wasn’t yet reflected in the property’s taxable value.

Once the completed home is assessed, the property-tax bill can increase significantly.

If the mortgage payment was initially based on a lower tax estimate, the escrow account may later need to adjust.

That can result in a higher monthly payment and potentially an escrow shortage.

When buying new construction, ask how the estimated future taxes were calculated rather than relying solely on the property’s current tax bill.

Can Homeowners Insurance Cause an Escrow Shortage?

Absolutely.

Homeowners insurance premiums can change from year to year.

If your annual premium increases from $1,500 to $2,100, that’s another $600 per year that eventually needs to come from the escrow account.

That’s approximately another $50 per month.

If the servicer already paid the higher premium before enough additional money had been collected, it can also contribute to an escrow shortage.

This is why reviewing your insurance renewal is important even when your mortgage company pays the bill.

You’re still paying for the insurance.

It’s simply being paid through escrow.

Can You Shop for Cheaper Homeowners Insurance if It’s Escrowed?

Yes.

Having homeowners insurance included in your escrow account doesn’t generally mean you’re permanently tied to the same insurance company.

You can shop for insurance and potentially change carriers.

If you do change policies, however, make sure the new insurer and mortgage servicer have the correct information so premiums are handled properly and there isn’t an unintended lapse or duplicate payment.

Reducing your homeowners insurance premium may also reduce the amount that ultimately needs to be collected through escrow.

What Happens if Your Insurance Company Cancels Your Policy?

Don’t ignore it.

Mortgage agreements generally require homeowners to maintain adequate property insurance.

If your coverage lapses, the servicer may take steps to protect the lender’s interest in the property, which can include obtaining insurance coverage and charging the cost to the borrower.

That type of coverage can be more expensive and may provide different protection than a policy you select yourself.

If you receive a cancellation or nonrenewal notice, address it quickly and make sure replacement coverage is properly communicated to your mortgage servicer.

Can Property Taxes Go Down?

Yes.

Property taxes aren’t guaranteed to increase every year.

Changes in taxable value, millage rates, exemptions, assessments or other circumstances can affect the bill.

If the tax expense decreases and the mortgage servicer’s next escrow analysis reflects the lower amount, the monthly escrow requirement may decrease as well.

But don’t assume the payment will change immediately when you receive a lower tax bill.

The servicer’s escrow analysis and payment schedule determine when the adjustment is reflected.

What if the Mortgage Company Pays the Wrong Tax Amount?

If something on your escrow account doesn’t look right, contact the mortgage servicer.

Keep copies of:

• Property-tax bills
• Insurance declarations
• Insurance renewal notices
• Escrow statements
• Payment records
• Any correspondence with the servicer

If the amount the servicer is using doesn’t match the actual bill, it’s much easier to resolve the issue when you have the documents available.

Your Fixed Mortgage Rate and Your Fixed Mortgage Payment Are Not Exactly the Same Thing

This distinction can save a lot of confusion.

A fixed-rate mortgage means the interest rate on the mortgage is fixed.

It doesn’t mean every component of your total housing payment can never change.

Property taxes can change.

Homeowners insurance can change.

Mortgage insurance can sometimes change or eventually be removed depending on the type of loan and circumstances.

HOA dues can change, although they’re often paid separately rather than through the mortgage escrow account.

So when someone says:

“I have a fixed mortgage. Why did my payment go up?”

The first place I’d look is usually the escrow analysis.

Very often, the answer is sitting right there.

Are Escrow Accounts Required on a Mortgage?

Not always.

Whether you’re required to have an escrow account can depend on several factors, including:

• Type of mortgage
• Down payment or loan-to-value ratio
• Lender requirements
• Property type
• Whether flood insurance is required
• Applicable federal or state requirements

Some mortgage programs generally require escrow accounts, while other borrowers may have the option to pay property taxes and homeowners insurance themselves.

Even when an escrow account isn’t required, some homeowners prefer having one because it spreads large expenses throughout the year.

Others would rather manage the money themselves.

Are Escrow Accounts Required on FHA Loans?

FHA loans generally require an escrow account for property taxes and applicable insurance expenses.

That means an FHA borrower will typically make a monthly payment that includes principal, interest and amounts collected toward property taxes and insurance.

FHA borrowers also generally pay mortgage insurance, which is another component that can affect the total monthly payment.

So when comparing an FHA loan with another mortgage option, don’t compare only the interest rates.

Compare the complete monthly payments and cash required at closing.

Are Escrow Accounts Required on Conventional Loans?

With a Conventional loan, escrow requirements can depend on the transaction and lender.

Some borrowers may be permitted to waive escrow and pay their own property taxes and homeowners insurance directly.

Whether that’s available can depend on factors such as the loan-to-value ratio and lender requirements.

There may also be pricing or fee considerations associated with waiving escrow.

If you’re considering it, we can compare both structures before closing.

What Does It Mean to Waive Escrow?

Waiving escrow generally means you’re taking responsibility for paying certain property expenses yourself rather than having the mortgage servicer collect money each month and pay them for you.

Your monthly payment to the mortgage company may therefore be lower because taxes and homeowners insurance aren’t being collected with the mortgage payment.

But your actual cost of owning the home isn’t lower.

You’re simply paying those expenses separately.

Suppose your mortgage payment without escrow is:

$1,650 per month

And your annual property taxes and homeowners insurance total:

$6,600 per year

You still need that $6,600.

The difference is that you’re responsible for making sure the money is available when those bills arrive.

Is It Better to Have an Escrow Account or Pay Taxes Yourself?

There’s no universal answer.

Some homeowners love escrow because it’s simple.

They make one mortgage payment each month and let the servicer handle the tax and insurance bills.

Other homeowners prefer managing their own money.

Advantages of having an escrow account can include:

• Easier monthly budgeting
• No large property-tax bill to save for separately
• Servicer handles tax and insurance payments
• Less chance of accidentally missing a due date

Reasons someone might prefer to waive escrow can include:

• More control over their money
• Ability to manage tax and insurance payments themselves
• Not having additional money held by the mortgage servicer
• Greater visibility into when bills are actually paid

The important question isn’t which approach is universally better.

It’s which one fits your mortgage and the way you manage your finances.

Can You Remove Escrow After Closing?

Possibly.

If your mortgage currently has an escrow account, you may eventually be able to request that it be removed, depending on your loan type, loan-to-value position, payment history, lender or servicer requirements and applicable rules.

It isn’t something you should assume can automatically be removed after a certain number of payments.

Contact your mortgage servicer and ask what requirements apply to your particular loan.

And remember that removing escrow doesn’t eliminate property taxes or homeowners insurance.

It simply makes you responsible for paying them directly.

Should You Remove Escrow if You Have the Option?

Think about how you handle money before deciding.

If your annual property taxes are $5,000 and homeowners insurance is $2,000, removing escrow means you’ll need to independently budget $7,000 per year for those expenses.

If you’re disciplined about saving for large bills, that may not be a problem.

If receiving a several-thousand-dollar tax bill twice a year would create financial stress, keeping escrow may be useful.

Don’t remove escrow simply because it makes the monthly mortgage payment displayed on your statement look smaller.

Your true housing expenses haven’t disappeared.

What Happens to Your Escrow Account When You Refinance?

When you refinance your mortgage, the existing loan is generally paid off and replaced by a new mortgage.

The escrow account associated with the old mortgage doesn’t simply become the escrow account for the new loan.

If the new mortgage requires an escrow account, a new escrow account may need to be established as part of the refinance.

Meanwhile, any remaining funds in the old escrow account are generally handled by the previous servicer after payoff, subject to applicable servicing requirements.

This can sometimes confuse homeowners because they may see money being collected for a new escrow account at closing even though there’s still money sitting in the old one.

You’re not necessarily paying the same taxes twice.

You’re establishing the account for the new mortgage while waiting for the previous escrow balance to be returned.

Can You Use Your Old Escrow Balance to Pay Closing Costs on a Refinance?

Don’t automatically count on it.

The old escrow account is tied to the mortgage being paid off, and the remaining balance may not be returned until after that payoff is processed.

That means you may need enough funds to establish the new escrow account before receiving the old escrow refund.

When we’re evaluating whether a refinance makes sense, this is one of the cash-flow considerations worth understanding ahead of time.

What Happens to Escrow When You Sell Your House?

When you sell the property, the mortgage is generally paid off as part of the transaction.

Any remaining escrow balance is then handled by the mortgage servicer according to applicable servicing rules.

This is separate from property-tax adjustments that may appear on the closing statement between the buyer and seller.

If you’re selling one home and buying another, don’t automatically assume your old escrow balance will be available before you close on the new house.

The timing can matter.

How Long Does It Take to Get an Escrow Refund?

The timing depends on why the refund is being issued and applicable servicing requirements.

An escrow surplus discovered during an annual analysis is different from the remaining escrow balance after a mortgage has been paid off.

If you’ve recently refinanced or sold your home and believe you’re owed an escrow refund, watch for correspondence from your former mortgage servicer and make sure they have your current mailing address.

What Happens to Escrow if Your Mortgage Servicer Changes?

Mortgage servicing rights can be transferred from one company to another.

If that happens, your escrow account doesn’t simply disappear.

The new servicer takes over responsibility for servicing the mortgage, including applicable escrow administration.

You should receive information explaining where future mortgage payments should be sent and when the transfer becomes effective.

Pay attention to those notices.

Also review your first statements from the new servicer to make sure your payment and escrow information appear correct.

What Happens to Escrow When You Pay Off Your Mortgage?

Once the mortgage is completely paid off, the mortgage servicer will no longer be collecting money each month to pay future property taxes and homeowners insurance.

You’ll become directly responsible for those expenses.

This can be easy to overlook for someone who has had an escrow account for 20 or 30 years.

Paying off the mortgage is great.

But the property-tax and insurance bills don’t disappear with it.

You’ll need to make sure you know:

• When property taxes are due
• Where they’re paid
• When homeowners insurance renews
• How the insurance premium will be paid

Can You Change Homeowners Insurance While You Have Escrow?

Yes.

As discussed earlier, having an escrow account doesn’t generally prevent you from shopping for homeowners insurance.

If you find another policy that better fits your needs, make sure the transition is handled correctly.

The new insurance company and mortgage servicer need the appropriate mortgagee and billing information.

You also want to avoid a situation where the old policy and new policy are both paid unnecessarily or where neither is paid and your coverage lapses.

What Should You Check on Your Escrow Statement?

When you receive an annual escrow analysis, don’t just look at the new monthly payment.

Look at the underlying numbers.

Check:

Property taxes: Does the amount reasonably match your actual tax bills?

Homeowners insurance: Does it match your current insurance premium?

Current balance: How much is currently in the account?

Shortage or surplus: Is the servicer projecting too little or too much?

New monthly escrow payment: How much will be collected going forward?

Shortage repayment: Is part of the payment increase temporary?

This can help you determine exactly why your mortgage payment changed.

Mortgage Escrow Account FAQs

Is escrow part of my mortgage payment?

If your loan has an escrow account, money for property taxes and homeowners insurance may be collected as part of your monthly mortgage payment.

Does escrow pay my property taxes?

If property taxes are escrowed, your mortgage servicer generally uses money from the account to pay the applicable property-tax bills when they’re due.

Does escrow pay homeowners insurance?

If homeowners insurance is escrowed, the servicer generally pays the premium from the escrow account.

Can my escrow payment increase every year?

It can change when the expenses being paid through the account change.

Property-tax increases and homeowners insurance premium increases are common reasons for a higher escrow payment.

Why did my payment increase if my interest rate didn’t?

If you have a fixed-rate mortgage, the principal and interest portion may remain unchanged while the escrow portion increases because of higher property taxes or insurance.

Is an escrow shortage bad?

Not necessarily.

An escrow shortage can simply mean the expenses paid from the account were higher than previously projected.

Can I pay my escrow shortage all at once?

You may have that option depending on the circumstances and your mortgage servicer. Review your escrow analysis or contact the servicer to understand the available choices.

Will paying an escrow shortage lower my mortgage payment?

It may reduce the portion of a payment increase associated with repaying the shortage.

However, if your taxes or insurance permanently increased, the regular monthly escrow collection may still need to increase.

Can I choose not to escrow?

Possibly, depending on your mortgage program, loan structure and lender requirements.

Do FHA loans require escrow?

FHA mortgages generally require escrow for applicable property taxes and insurance.

Can I remove escrow from a Conventional mortgage?

Possibly. Eligibility can depend on the loan, equity position, payment history and servicer requirements.

Do I lose the money in my escrow account when I refinance?

No. Remaining funds in the old escrow account are generally returned or otherwise handled by the previous servicer after the old mortgage is paid off, subject to applicable servicing rules.

What happens to my escrow money when I sell my home?

Once the mortgage is paid off through the sale, the mortgage servicer handles the remaining escrow balance according to applicable requirements.

Why are my Michigan property taxes higher than the previous owner’s?

Michigan’s taxable-value rules can result in a property’s taxable value changing after a transfer of ownership. This is why the seller’s current tax bill shouldn’t automatically be treated as the buyer’s future property-tax amount.

Understanding Escrow Before You Buy a Home in Michigan

Escrow isn’t necessarily complicated once you understand what the account is actually doing.

Your mortgage servicer is essentially helping you set aside money throughout the year for expenses that would otherwise arrive as much larger bills.

The biggest thing Michigan homebuyers should understand is that your total mortgage payment can change even when your interest rate is fixed.

Property taxes can change.

Homeowners insurance can change.

Escrow shortages can occur.

And in Michigan, property taxes after a home purchase deserve particular attention because the previous owner’s tax bill may not accurately represent what the new owner will eventually pay.

At BrightSide Lending, we want you to understand more than whether your mortgage is approved.

We’ll walk you through your estimated payment, closing costs, prepaid expenses and initial escrow requirements so you understand where your money is going before you get to the closing table.

If you’re considering buying or refinancing a home in Michigan and have questions about your mortgage payment or escrow account, we’re happy to help.

BrightSide Lending
More Than a Mortgage. A Brighter Tomorrow.