What Is an Escrow Balance, and How Is It Calculated?

Mortgage servicers use escrow accounts to cover the cost of home insurance premiums, among other things.

Sarah Archambault
Sarah Archambault
  • Experienced personal finance writer

  • 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.

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Danny Smith
Edited byDanny Smith
Photo of an Insurify author
Danny Smith
  • Licensed auto and home insurance agent

  • 4+ years in content creation and marketing

As Insurify’s home and pet insurance editor, Danny also specializes in auto insurance. His goal is to help consumers navigate the complex world of insurance buying.

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Updated April 20, 2023

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What is an escrow account, and how does it work?

An escrow, or impound, account is a special type of account set up by your mortgage lender or loan servicer. 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.[2]

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.[1]

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 your property taxes and home insurance to be paid through an escrow account as part of your mortgage agreement.[1]

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.[1] If you’re unsure who your loan servicer is, check your mortgage statement or coupon payment book for the company’s name.[3]

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.[4] You’ll likely also be required to keep a minimum balance equal to at least two months of escrow payments in your account.[2]

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.[2]

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.[2]

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.[2]

Learn More: Escrow Shortage: What Is It and How Do You Pay It Off?

Learn More: Escrow Shortage: What Is It and How Do You Pay It Off?

Deficiencies

Loan servicers may require you to make additional monthly deposits if your escrow account is deficient. When the deficiency is less than a 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.[2]

How can you 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.[2]

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[2]

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?

Some mortgage servicers and lenders pay interest on escrow balances, but it’s not a requirement. Shop around for a lender that will allow you to accrue interest on your escrow balance or partner with one that doesn’t require an escrow account and put the funds into an interest-bearing savings account instead.[6]

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.[1] However, if your account has an overage, you may be eligible for a refund.[2]

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.[7]

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Escrow balance FAQs

Escrow can be a confusing concept. We tried to make it a little easier to understand by answering some of the most common questions homeowners have about escrow accounts.

  • Is it good to have an escrow balance?

    Having an escrow balance means that you have enough funds in your escrow account to cover payments for important bills, such as property taxes and home insurance.[1] You may even be eligible for a refund or credit toward the following year’s payments if you have a surplus. On the other hand, if you don’t have enough money in your account, you could be on the hook to cover the shortage or any deficiencies.[2]

  • What happens when you pay off your escrow balance?

    You can’t pay off an escrow balance, but if you pay off your mortgage, any remaining funds in your escrow account will be refunded. Lenders typically return the remaining money in your escrow account within 20 days of paying off your mortgage.[8]

  • What does a high escrow balance mean?

    A high escrow balance means that your escrow account has enough money to cover the bills your servicer needs to pay on your behalf, such as homeowners insurance and property taxes. Depending on your balance, you may also have a surplus of funds, making you eligible for a refund or credit.[2]

  • What does a negative escrow balance mean?

    A negative escrow balance means you don’t have enough money in your escrow account for your loan servicer or mortgage company to cover your property taxes, homeowners insurance, and other bills on your behalf. Depending on your annual escrow analysis, you could have a deficiency and may need to pay extra to cover the difference.[2]

  • What is the difference between escrow and principal balance?

    Your monthly mortgage payment comprises three parts: principal, interest, and escrow. When looking at your balances, your escrow balance is the amount of money in your account. Your lender or servicer uses these funds to pay for expenses. Your principal balance, on the other hand, is the remaining amount you owe on your mortgage.[9]

Sources

  1. Consumer Financial Protection Bureau. "What is an escrow or impound account?."
  2. Consumer Financial Protection Bureau. "Escrow accounts."
  3. Federal Trade Commission. "Your Rights When Paying Your Mortgage."
  4. Consumer Financial Protection Bureau. "Why did my monthly mortgage payment go up or change?."
  5. U.S. Bank. "How do I access escrow information for my mortgage?."
  6. Quicken Loans. "What Is An Escrow Account? Definition And Facts."
  7. Nationwide. "Changing homeowners insurance with an escrow account."
  8. Rocket Mortgage. "Escrow Refund: What Is It and When Does It Occur?."
  9. Consumer Financial Protection Bureau. "On a mortgage, what’s the difference between my principal and interest payment and my total monthly payment?."
Sarah Archambault
Sarah Archambault

Sarah Archambault enjoys helping people figure out smarter ways to use their money. She covers auto financing, banking, credit cards, credit health, insurance, and personal loans. She’s created and edited content for Credit Karma, Experian and Sound Dollar, along with banks, financial institutions, and insurance companies.

Danny Smith
Edited byDanny Smith
Photo of an Insurify author
Danny Smith
  • Licensed auto and home insurance agent

  • 4+ years in content creation and marketing

As Insurify’s home and pet insurance editor, Danny also specializes in auto insurance. His goal is to help consumers navigate the complex world of insurance buying.

Featured in

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