What homeowners should know about how escrow works—and why your payment can change.
When you have a mortgage, you’ll likely hear the word escrow more than once. While it may sound technical, escrow is simply a tool designed to make homeownership easier by helping manage some of your biggest recurring expenses. Here’s a clear, homeowner-friendly breakdown of what escrow accounts are, how escrow analysis works and what it means for your monthly mortgage payment.
What Is an Escrow Account?
An escrow account is a separate account connected to your mortgage that helps cover expenses like property taxes and homeowners insurance. Instead of paying those large bills all at once when they’re due, a portion of your monthly mortgage payment is set aside into escrow throughout the year.
When tax or insurance bills come due, your mortgage servicer pays them on your behalf using the funds in your escrow account. This helps ensure payments are made on time and reduces the stress of budgeting for large annual or semi-annual expenses.
When Is Escrow Required?
In many cases, escrow accounts are required as part of a mortgage agreement. If escrow is required, it’s typically established at closing or shortly after your loan begins. If your mortgage is transferred from another servicer and already has an escrow account, that account transfers with it.
In some situations, such as unpaid property taxes or a lapse in insurance coverage, an escrow account may be added to help bring the loan back into good standing. When escrow is added for these reasons, it usually must remain in place going forward.
Can You Add or Remove Escrow?
Depending on your loan type and eligibility, you may be able to request changes to your escrow setup:
Already have escrow? You may request removal, though approval depends on loan guidelines and payment history
Not all loans qualify, so it’s always best to confirm your options with your mortgage servicer.
What Is an Escrow Analysis?
An escrow analysis, usually called an escrow review, is an annual evaluation of your escrow account. During this review, your servicer looks at:
What you paid for taxes and insurance over the past year
What those costs are expected to be in the coming year
Whether your escrow balance will stay above the required minimum
Federal regulations require escrow analyses to be completed at least once a year to ensure your account stays properly funded.
After the review, you’ll receive an Escrow Review Statement that outlines:
Last year’s escrow contributions
Tax and insurance payments made on your behalf
Any projected shortage or surplus
Your updated monthly payment for the year ahead
Why Your Payment Might Change
Escrow reviews often explain why a mortgage payment increases or decreases from year to year. Two common outcomes are shortages and surpluses.
Escrow Shortage
A shortage occurs when projections show your escrow balance dropping below the required minimum during the upcoming year, which is often due to rising taxes or insurance premiums.
If this happens, you generally have two options:
Spread the shortage over the next 12 months, which increases your monthly payment
Pay the shortage upfront as a one-time lump sum
Even if you pay the shortage in full, your payment may still increase if your future tax or insurance costs are higher than before.
Escrow Surplus
A surplus means there’s more money in your escrow account than needed.
If the surplus is $50 or more and your account is current, you’ll typically receive a refund check
Smaller surpluses are usually applied over the next year to reduce your monthly payment
If an account is delinquent, surplus funds may remain in escrow for future expenses
How Escrow Balances Are Calculated
Your escrow statement includes a month-by-month projection showing:
Expected escrow deposits
Scheduled tax and insurance payments
The lowest projected balance for the year
That lowest balance is compared to the required minimum. Falling below it creates a shortage; exceeding it creates a surplus.
The Bottom Line
Escrow accounts are designed to simplify homeownership by spreading out large expenses and ensuring important bills are paid on time. Annual escrow analyses help keep everything aligned with real-world costs, even when taxes or insurance change.
If you ever have questions about your escrow account, review statement or payment changes, the mortgage team at Extraco Mortgage is always here to help you understand the details and plan with confidence.
We’re here to help, so contact us if you have any questions about your escrow account.
