An escrow account is a savings account managed by your mortgage servicer that collects a portion of your property taxes and homeowner's insurance each month along with your mortgage payment.
When taxes and insurance bills are due, the servicer pays them from the escrow account. This spreads large annual or semi-annual bills into manageable monthly payments. Most lenders require escrow accounts for loans with less than 20% down.
You can request escrow cancellation once you reach 20% equity.
How Escrow Works
Each month, your mortgage payment includes four components: Principal, Interest, Taxes, Insurance. This is known as PITI. The taxes and insurance portions go into your escrow account. When your property tax bill or insurance premium is due, the servicer pays it from the account. You never directly handle these large payments.
Escrow Startup and Cushion
When your loan closes, your escrow account needs a startup balance. This is typically 2 to 6 months of taxes plus insurance premiums. This appears as an escrow prepayment at closing. The servicer also keeps a small cushion (typically 2 months of escrow payments) as a buffer against rate increases.
Escrow Analysis
Your servicer performs an annual escrow analysis. If property taxes or insurance increased, your monthly escrow payment goes up. If they decreased, your payment goes down. You will receive a statement showing the analysis.
Texas Property Taxes in Escrow
Texas property taxes are among the highest in the nation (average 1.8 to 2.2 percent). On a $300,000 home, that is $450 to $550 per month in escrow for taxes alone. Plus $150 to $300 per month for insurance. Total escrow: $600 to $850 per month, a significant portion of your PITI payment.
Can You Waive Escrow?
Some lenders allow you to waive escrow if you have 20 percent or more equity and agree to pay taxes and insurance yourself. You will need to demonstrate the ability to make large annual payments. Most lenders charge a fee (about 0.25 percent) for escrow waivers.