Unwrapping Escrow: What It Covers and Why It Can Change

When you first took out your mortgage, the monthly payment was probably one of the biggest factors in your decision-making. Most buyers focus on principal and interest when budgeting for a house, especially with a fixed-rate mortgage that promises predictable payments. But there’s another piece of the puzzle that can shift over time: escrow.

Understanding how escrow works can help you avoid unexpected changes to your monthly mortgage payment and keep your financial plans on track. So, let’s unwrap the details and see what’s inside.

What Is Escrow?

Your monthly mortgage payment typically covers four components:

While your lender applies the principal and interest directly toward your loan, the taxes and insurance amounts are held in an escrow account. This account is used to pay property taxes, homeowners insurance, and mortgage insurance (if applicable) on your behalf throughout the year.

What Is an Escrow Analysis?

Each year, your lender or mortgage servicer performs an escrow analysis to ensure your account has enough funds to cover upcoming expenses. This review estimates the taxes and insurance costs for the next 12 months and checks whether your escrow balance meets the required minimum.

The time of year you’ll receive your escrow analysis can vary, but it usually coincides with your state’s property tax schedule.

Upon receiving your analysis, you may end up with a surplus or a shortage in your escrow account. A surplus happens when your taxes and insurance costs were lower than expected, and you have more money in your account than is needed. In this case, you may receive a refund check — a little gift from your escrow account.

A shortage happens when your taxes and insurance costs were higher than anticipated and your escrow account may fall below the minimum required balance. Your shortage can be paid all at once or spread over the next 12 months and added to your monthly payment.

 

Why Escrow Amounts Change

Escrow changes are driven by fluctuations in property taxes and insurance premiums. And lately, those costs have been climbing:

• The average property insurance premium has gone up 61% over the last five years.¹

• In 2024 alone, premiums rose by a record 14%.¹

• As home values have risen, property taxes have followed suit. In 2024, the average tax on a single-family home hit $4,172, a 2.7% increase over the previous year.²

How to Keep Escrow Costs in Check

If you’re concerned about rising payments, there are a few things you can do to manage your escrow-related expenses:

• Review your homeowners insurance policy and look for ways to lower your premium.

• Get rid of private mortgage insurance if you have at least 20% equity in your home.

• Appeal your property tax assessment if you believe your home’s assessed value is too high.

You can also talk to your mortgage lender about refinancing to a lower rate to help reduce your overall mortgage payment.

While changes in escrow can bring surprises, the system is designed to help you avoid large lump-sum payments for taxes and insurance. It’s a way to spread out those costs evenly, like budgeting for gifts throughout the year instead of all at once.

If you have questions about your escrow account or mortgage payment, reach out to your mortgage lender or servicer. They can help you understand your analysis and explore your options.

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Sources:

[1] ICE Mortgage Monitor, March 2025

[2] ATTOM Data, 2024 Property Tax Analysis