Background working with banks and insurance companies
Sarah enjoys helping people find smarter ways to spend their money. She covers auto financing, banking, credit cards, credit health, insurance, and personal loans.
7+ years in business and financial services content
Chris is a seasoned writer/editor with past experience across myriad industries, including insurance, SAS, finance, Medicare, logistics, marketing/advertising, and many more.
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You may have an escrow account if you’re a homeowner with a mortgage. Your lender uses your escrow balance, or the funds available in the escrow account, to pay for certain expenses, such as your home insurance premiums and property taxes.[1]
Here’s what you should know about escrow balances.
What is an escrow account, and how does it work?
An escrow account is a special type of account that your mortgage lender or loan servicer sets up. The account’s purpose is to act as a neutral third party that receives and distributes funds based on a contract. In the case of a home purchase, your account will be a third party between the buyer and the seller of the home.
When you make your monthly payment, the lender puts some funds aside into an escrow account. Your lender then uses these funds to cover specific types of expenses you may have as a homeowner, such as property taxes, home insurance premiums, flood insurance, and federal loan charges.
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Escrow accounts for home buying
Escrow accounts offer homebuyers flexibility. The escrow account will hold the homebuyer’s “earnest money,” which will go to the seller once the buyer signs the contract or cancels the transaction. This gives the homebuyer a safety net to ensure the seller follows through on any agreed-upon repairs, as the escrow money won’t be released otherwise.
Escrow accounts for insurance and taxes
Homeowners typically pay taxes and insurance twice a year. Having an escrow account can make budgeting for these large expenses easier. An escrow account allows you to split the payments into smaller amounts rather than paying lump sums to your tax collector or home insurance company.
Who manages an escrow account?
Your mortgage lender or loan servicer manages your escrow account and uses the funds to pay property-related expenses on your behalf. A lender or servicer will often require you to pay your property taxes and home insurance through an escrow account as part of your mortgage agreement.
This helps the lender ensure that these mandatory bills are paid on time. In certain states, the law may even require escrow accounts to be used for payments. If you’re unsure who your loan servicer is, check your mortgage statement or coupon payment book for the company’s name.[2]
Important Information
Your servicer can also change over the life of your loan, so it’s a good idea to check this information periodically.
Is it common to have an escrow balance?
Yes. It’s normal for both property taxes and home insurance premiums to fluctuate from year to year. As a result, your total monthly mortgage payment to your loan servicer or lender may increase or decrease.[3] You’ll likely also be required to keep a minimum balance equal to at least two months of escrow payments in your account.
Your lender must conduct an escrow analysis when it opens your escrow account and then every year after the account is open. This ensures you have enough money in your account to cover property taxes and insurance expenses.[4]
Types of escrow account balances
A couple of different types of escrow balances are available, and you may have more than one type of escrow balance at the same time. Here, you can learn more about each of the different escrow balance types.
Surpluses
If you’re up to date on your mortgage payments and your account has a surplus of more than $50, your mortgage servicer must refund you the overage amount within 30 days. If the amount is less than $50, it can refund the extra cash or add a credit to your account for the following year.
Shortages
If you have a shortage in your escrow account, it means there isn’t enough money in the account for the lender to cover an upcoming payment on your behalf. For accounts with a shortage of less than one month’s payment, the servicer may do nothing, require you to make up the difference within 30 days, or have you pay it back in equal installments over a minimum of 12 months.
If you owe more than the equivalent of one month’s escrow, the servicer can let the shortage exist or require you to pay it back over a period of at least 12 months.
Deficiencies
Loan servicers may require you to make additional monthly deposits if your escrow account is deficient. When the deficiency is less than one month’s escrow, your lender may do nothing, require you to repay the difference within 30 days, or ask you to cover the difference in two or more equal monthly installments. Deficiencies equal to or more than one month’s escrow payment may also require repaying the deficiency in two or more equal payments.
How to find your escrow account balance
Every year, after completing an escrow analysis, your mortgage servicer must provide you with an annual escrow account balance statement. The statement must include either the initial escrow account statement or the previous year’s projection, along with a detailed account history that shows any activity in the escrow account computation year and projected activity for the next year.
It must also include the following information:
Current and past year’s monthly mortgage payments
Total funds paid into and out of the escrow account in the last year
Escrow account balance at the end of the year
Explanation of how your lender will handle a surplus, shortage, or deficiency
Any reasons why the estimated low monthly balance wasn’t reached, if applicable
You may also be able to view your current balance if your lender has an online account portal.[5]
Does an escrow balance accrue interest?
Fifteen different states require lenders to pay interest on escrow accounts, though legal exceptions can bar the paying of this interest in some cases. And if you’re able to earn interest off your escrow account, expect the amount you earn to be nominal and not a long-term investing strategy.
And if you don’t live in one of these 15 states, your lender probably won’t put your escrow into an account that earns interest.
Shopping around gives you the best chance to find a lender that will allow you to accrue interest on your escrow balance.
Keep in Mind
If you move your funds into a personal savings account, you’ll be on the hook for paying your property taxes and homeowner insurance policy payments directly.[1]
Can you access the money in an escrow account?
Your lender or mortgage servicer must use escrow accounts to pay certain types of bills, such as your property taxes and homeowners insurance. While you’re responsible for contributing funds to an escrow account, only the servicer can access these funds. But if the amount in your account exceeds the necessary expenses, you may be eligible for a refund.
The mortgage servicer will perform an escrow analysis and identify these excess funds, and the refund will come to you, typically in the form of a check.
What happens to your escrow balance if you switch home insurance companies?
Your escrow account won’t be affected if you decide to switch home insurance companies, but you must notify the lender of the switch. Sometimes, your new insurance company may contact your lender and provide a copy of your new premium bill and proof of insurance on your behalf.
If your new insurer doesn’t manage the paperwork, you can let your lender know directly. You’ll likely have to inform them in writing that you’ve canceled your old policy and send them a copy of your new policy’s declarations page.
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Escrow balance FAQs
Escrow can be a confusing concept. This additional information can help you understand more about how escrow accounts work.
Does an escrow balance mean you owe money?
An escrowed mortgage splits each payment into three components. The first two portions go toward your principal and interest. The third portion goes to your escrow balance. This balance will pay your taxes and insurance. Continue making your monthly mortgage payments and your escrow balance will take care of itself.
Do you get your escrow balance back?
Perhaps. If the amount in your escrow balance exceeds the necessary expenses, your lender could issue you a refund. In most cases, this refund will come to you as a check.
What happens when your escrow balance runs out?
It’s possible for your escrow balance to run out before your bills are paid. This commonly happens if your taxes or insurance rates increase dramatically. If the balance is depleted and costs remain, those costs will then be split over the next 12 mortgage payments.
Who owns the money in an escrow account?
The money in your escrow account belongs to you, the policyholder, and is used to pay for the insurance and tax expenses of your monthly mortgage payment. If the amount of money in the account exceeds the funds necessary to pay these bills, you’ll be issued a refund. It’s also possible to earn interest on your escrow account funds in 15 states.
U.S. Bank. "How do I access escrow information for my mortgage?."
Sarah Archambault
Sarah Archambault enjoys helping people figure out how to manage their finances and credit. She covers auto financing, banking, credit cards, credit health, insurance, and personal loans. Her work has been featured on Credit Karma, Experian, LendingClub, Sound Dollar and USA Today Blueprint. She also writes for national insurers, banks and financial institutions like Aetna, MassMutual, Stripe, and UnitedHealthcare.
Sarah has been a contributor at Insurify since December 2022.
7+ years in business and financial services content
Chris is a seasoned writer/editor with past experience across myriad industries, including insurance, SAS, finance, Medicare, logistics, marketing/advertising, and many more.
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