A mortgage escrow account collects property tax payments as part of your monthly mortgage payment. Your lender holds the funds and pays your property taxes when due. Each year, your lender performs an escrow analysis to ensure the right amount is being collected. Escrow accounts make tax payments predictable by spreading the annual cost across 12 monthly payments.
How Escrow Works
When you get a mortgage, your lender often requires an escrow account for property taxes and insurance. Each month, a portion of your payment goes into the escrow account. The lender estimates your annual tax bill, divides it by 12, and adds that amount to your monthly payment. When the tax bill comes due, the lender pays it from the escrow account. This ensures taxes are always paid on time and avoids the need for a large lump sum payment.
Annual Escrow Analysis
Once a year, your lender reviews your escrow account in a process called an escrow analysis. They compare what was collected versus what was actually paid out. If the account has a surplus, you can get a refund or the surplus is applied to reduce future payments. If there is a shortage, your monthly payment may increase to make up the difference. The analysis accounts for changes in property taxes, insurance premiums, and any new assessments.
Benefits of an Escrow Account
Escrow accounts simplify tax payments by breaking a large annual expense into manageable monthly amounts. They also ensure your taxes are always paid on time, eliminating the risk of penalties, interest, or tax liens due to missed payments. Lenders prefer escrow accounts because they protect their lien priority. If you have more than 20 percent equity, you may be able to request cancellation of your escrow account with some loan types.