Escrow Explained (Without the Confusion)
If you’ve ever looked at your mortgage payment and wondered, “What is escrow, and why does it keep changing?” You’re not alone.
Escrow is one of the most misunderstood parts of homeownership, yet it plays a major role in protecting both your home and your loan. Let’s break it down in plain language.
What Is Escrow?
Think of escrow like a savings account with a purpose.
Instead of you having to remember to pay large bills like property taxes and homeowners’ insurance once or twice a year, your mortgage company:
Collects a small portion each month
Holds it in an escrow account
Pays those bills on your behalf when they’re due
This helps ensure those critical expenses are always paid on time.
What Goes into an Escrow Account?
Your total monthly mortgage payment is often made up of four parts:
Principal – the portion that pays down your loan balance
Interest – the cost of borrowing the money
Property Taxes – collected monthly and stored in escrow
Homeowners Insurance – also collected monthly and stored in escrow
Only taxes and insurance go into escrow.
Principal and interest do not.
Why Do Lenders Use Escrow?
Property taxes and homeowners’ insurance are required to protect the home. If they go unpaid:
Insurance could lapse
Taxes could result in penalties or even liens
The home (and loan) would be at risk
Escrow helps prevent those issues by keeping everything current automatically.
It protects you, your home, and the lender.
Why Did My Payment Change After Closing?
This is the most common escrow question we hear.
Your payment can change if:
Property taxes increase
Insurance premiums go up
The escrow account didn’t collect enough in the first year
Your interest rate didn’t change; the escrow portion did.
This adjustment helps ensure there’s enough money in the account to cover upcoming bills.
What Is an Escrow Shortage?
An escrow shortage happens when there wasn’t enough money collected to pay your taxes or insurance.
If this happens, you usually have options:
Pay the shortage in a lump sum
Or spread it out over future monthly payments
Your lender will explain the options available so you can choose what works best for you.
What Is an Escrow Analysis?
Once a year, your mortgage servicer performs an escrow analysis. This is simply a review to check:
How much was collected
How much was paid out
What’s expected for the coming year
Based on that review, your payment may be adjusted up or down. This is completely normal and part of responsible loan servicing.
Can I Opt Out of Escrow?
Sometimes, but not always.
Opting out of escrow may require:
A certain amount of equity
A specific loan type
Additional fees or conditions
Without escrow, you’d be responsible for paying taxes and insurance yourself, which some homeowners prefer and others don’t.
For many first-time buyers, escrow offers peace of mind and simplicity.
Why Understanding Escrow Matters
Escrow isn’t a hidden fee or a trick; it’s a budgeting tool designed to help homeowners avoid large surprise bills.
When escrow is explained before closing, homeowners feel more confident and prepared, even if adjustments happen later.
That’s why education is such a big part of how we do mortgages.
Escrow can feel confusing at first, but once you understand how it works, it becomes just another part of responsible homeownership.
At TLP Mortgage, we believe clarity builds confidence. Our job isn’t just to get you to the closing table; it’s to make sure you understand what happens after you get the keys.
If you have questions about escrow, payment changes, or your mortgage in general, we’re always here to help.
