Loan Products · June 16, 2025
Understanding Escrow Accounts: How Your Taxes and Insurance Get Paid
Most mortgages include an escrow account that collects your property taxes and insurance monthly. Here is how escrow works, why lenders require it, and how to manage it.
An escrow account is a holding account managed by your mortgage servicer that collects funds monthly for property taxes and homeowners insurance — then pays these bills on your behalf when they come due.
Why Lenders Require Escrow
Lenders have a security interest in your property. If you fail to pay property taxes, the government can eventually take the property through a tax lien or sale — wiping out the lender's mortgage. If you let homeowners insurance lapse and the home burns down, the lender loses their collateral.
Escrow eliminates both risks by ensuring these bills are paid automatically from funds collected monthly.
How Escrow Payments Are Calculated
Your servicer takes your annual property tax bill (or estimate) and annual homeowners insurance premium, adds them together, divides by 12, and adds that amount to your monthly payment.
Example: $6,000 annual taxes + $1,800 annual insurance = $7,800/year divided by 12 = $650/month collected into escrow.
The Escrow Cushion
Federal law (RESPA) allows lenders to maintain a cushion of up to 2 months of escrow payments. This buffer handles timing differences between when funds are collected and when bills are due.
Annual Escrow Analysis
Every year your servicer performs an escrow analysis: comparing what was collected against what was paid out. If they collected too much, you receive a refund check. If too little was collected (taxes or insurance increased), your monthly payment increases for the coming year to cover the shortage.
Can You Opt Out of Escrow
Some lenders allow escrow waivers for borrowers with 20%+ equity and excellent credit — often with a small fee. If you prefer to manage your own tax and insurance payments, ask your HMS loan officer about escrow waiver options.
Call 309-222-8286.