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What Is an Escrow or Impound Account?
An escrow account is a separate account maintained by the mortgage servicer to collect money for certain property-related bills. In some regions and mortgage documents, the same arrangement is called an impound account.
Instead of paying a large property-tax or insurance bill once or twice a year, the homeowner contributes an estimated amount with each monthly mortgage payment.
The servicer holds those funds and pays the eligible bills when due. Escrow does not reduce the loan balance and is separate from principal and interest.
How a Mortgage Escrow Account Works
The servicer collects, holds, reviews and disburses the escrow funds.
Monthly payment
The homeowner pays principal, interest and the estimated escrow amount.
Funds held
The escrow portion is placed into the account for upcoming bills.
Bills become due
Property-tax and insurance due dates arrive during the year.
Servicer pays
The servicer uses the account to pay eligible bills on time.
Annual analysis
The account is reviewed and the future monthly collection is recalculated.
Initial Escrow Deposit at Closing
When an escrow account is established, the closing figures may include an initial deposit so enough money will be available when the first tax and insurance bills become due.
The amount depends on the closing date, tax due dates, insurance renewal date and the projected bills. It may include several months of estimated expenses.
The initial escrow deposit is different from the prepaid homeowners-insurance premium. A prepaid premium pays for current coverage, while the escrow deposit builds the account for a future renewal.
Review our mortgage closing-cost guide for other prepaid and cash-to-close expenses.
Escrow Shortage, Deficiency and Surplus
These terms describe different account positions at the time of analysis.
Shortage
The current balance is below the target balance used in the escrow analysis.
Deficiency
The escrow account has a negative balance.
Surplus
The current balance is above the target balance used in the analysis.
Why Can the Payment Change on a Fixed-Rate Mortgage?
The interest rate may remain fixed while the escrow portion rises or falls.
Tax reassessment
A new assessed value can change the property-tax bill.
Local levy changes
Taxing jurisdictions may change mill levies or tax rates.
Insurance increases
Carrier pricing, coverage and deductibles affect the premium.
Shortage repayment
A shortage spread across future payments raises the amount due.
Expense removal
A lower bill or removed escrow item may reduce the collection.
Flood coverage changes
Required flood insurance can affect the projected escrow need.
What Homeowners Should Review
- Annual escrow statement and projected monthly collection
- County and local property-tax bills
- Homeowners-insurance renewal declarations
- Flood-insurance renewal information when applicable
- Servicer payment history for taxes and insurance
- Notices involving unpaid taxes or cancelled coverage
If a tax or insurance bill appears unpaid, contact the mortgage servicer promptly. A written information request or notice of error may provide additional servicing protections.
Mortgage Escrow and Impound Account FAQs
Answers to common questions about monthly collections and annual analyses.
What is an impound account?
An impound account is another name for a mortgage escrow account used to collect and pay certain property-related expenses.
Is an impound account the same as an escrow account?
Yes. The terms generally describe the same mortgage-servicing arrangement.
What does a mortgage escrow account pay?
It commonly pays property taxes, homeowners insurance and required flood insurance. Other eligible charges may apply.
Is escrow part of my mortgage payment?
The escrow collection may be included in the total amount paid to the servicer each month, but it is separate from principal and interest.
Why did my escrow payment increase?
Common reasons include higher taxes, increased insurance premiums, flood-insurance changes or repayment of an escrow shortage.
What is an escrow shortage?
A shortage means the current balance is below the target balance used in the escrow analysis.
What is an escrow deficiency?
A deficiency means the escrow account has a negative balance.
What is an escrow surplus?
A surplus means the current account balance exceeds the target balance at the time of analysis.
Can I pay an escrow shortage in one payment?
A servicer may accept a voluntary payment, but formal annual-statement repayment options are governed by applicable servicing rules.
What is an escrow cushion?
It is a permitted additional balance intended to reduce the chance that the account becomes underfunded.
How often is escrow analyzed?
Most covered accounts are analyzed annually, although additional analyses may occur when permitted.
Can I cancel my escrow account?
Possibly, depending on the loan program, LTV, investor, lender or servicer requirements and payment history.
Do FHA loans require escrow?
FHA loans generally require escrow accounts for property taxes and insurance.
Are HOA dues paid from escrow?
Usually not. HOA dues are commonly paid directly to the association.
Is mortgage insurance paid from escrow?
Mortgage-insurance charges may be included in the total monthly payment, but they are not always held and disbursed in the same way as tax and homeowners-insurance escrow funds.
What happens if property taxes increase?
The projected monthly escrow collection may increase, and the account may also show a shortage.
What happens if homeowners insurance increases?
The servicer may increase the future monthly escrow collection and address any resulting shortage.
What should I do if the servicer misses a payment?
Contact the servicer immediately and consider sending a written notice of error or information request.
Can my escrow payment decrease?
Yes. Lower projected taxes, insurance or other escrowed expenses may reduce the future collection.
Is the initial escrow deposit a closing cost?
It is part of cash to close, but it funds the borrower’s escrow account rather than functioning as an ordinary lender fee.
Related Mortgage Resources
Continue learning about mortgage payments, insurance and homeownership costs.
Metropolitan Mortgage Corporation
NMLS #227722
Serving Kansas and Missouri
This page and calculator are provided for general educational purposes and are not a formal escrow analysis, legal interpretation or commitment to lend. Escrow requirements and servicing treatment vary by loan, investor, servicer, state law and account status.