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Mortgage escrow: What is it?

Home financing

By StaffMay 8, 20254 min read

An exterior of a modern manufactured home with blue and gray siding, white dormers, and front porch on a bright green lawn.

So, what is a mortgage escrow? Read on to learn about how your escrow is calculated, reviewed annually, and more.

Mortgage escrow can be a confusing topic when it comes to home investment. That’s why we’ve broken down commonly asked questions about mortgage escrow so you can be informed as you choose a lender and take the next step toward homeownership.

Key takeaways:

Mortgage escrow is a process where additional funds are set aside by your mortgage servicer and used to pay property taxes and insurance premiums.
An escrow may be required or optional depending on your lender and the regulations of your loan type.
Your lender or mortgage servicer typically calculates your escrow amount by adding your annual property tax and insurance premium amounts together and dividing that number by 12 months.
An escrow review by your lender compares the account to your current bills for taxes and insurance to help identify if your escrow has a shortage or surplus in funds to cover them.

About Clayton

Founded in 1956, Clayton is committed to opening doors to a better life through homeownership. Clayton is a leading single-family, values-driven home builder dedicated to attainable housing, sustainable practices, and creating a world-class experience for customers and team members. The company’s portfolio includes a comprehensive range of site-built, modern manufactured, Tiny, CrossMod® and modular housing. In 2024, Clayton built more than 60,000 homes across the country. For more information, visit claytonhomes.com.

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Mortgage escrow is a process where additional funds are collected with your mortgage payments to pay for other expenses associated with homeownership. The additional money is set aside by your mortgage servicer and used to pay property taxes, home insurance premiums, and flood insurance premiums, if applicable, so you don’t have to scramble to pay a large tax bill or insurance premium all at once. These payments are made directly by your mortgage servicer when the amounts become due.

Lenders may have different guidelines and requirements concerning mortgage escrow, so be sure to ask when you’re searching for the right lender. Not all lenders will require escrow accounts for each customer, and one may be optional for a conventional mortgage, if your down payment is higher than 20%. However, your loan type may require it. Many government-sponsored home loans like an FHA or USDA loan do require them, no matter your down payment amount.

How is escrow determined?

To determine your escrow amount, your lender or mortgage servicer will usually add your annual property tax and insurance premium amounts together and divide the total number by 12.

The amount that is calculated will generally be the monthly amount you pay into your escrow account for the annual expenses. However, the calculation can be different if you choose a lender with a different payment frequency, like bi-monthly.

How are escrow accounts managed?

The amount in your escrow account can vary during the year because of the monthly payments you contribute or because of any changes in your tax assessments and insurance premiums. Lenders will typically cover any shortfalls until they can adjust your monthly payment to make up for tax and insurance premium increases, but be sure to ask you lender how they handle escrow shortfall situations.

Keep in mind that your monthly escrow payment also may fluctuate from year to year based on these tax and insurance premium adjustments. Talk to the lender you choose about how your escrow will be managed.

What’s the minimum balance on an escrow account?

A minimum balance on an escrow account is a specified minimum amount you will need to keep in your account to ensure there will be enough money in case of increases in taxes or insurance premiums. There is also a limit on how much your mortgage lender can require as a minimum balance and require you to pay each month for escrow. Before your loan closes, your chosen lender will typically estimate the total amount of your annual expenses to determine your escrow minimum balance.

What is an escrow review?

An escrow review or escrow analysis is when your lender or mortgage servicer reviews your escrow account after 12 months and compares the account to your current bills for taxes and insurance. This process helps identify if your escrow account matches the bills or if you have a shortage or surplus.

A shortage in your escrow account is when you don’t have enough funds in escrow, usually because of an increase in taxes or insurance premiums. If you have a shortage, you will be responsible for paying the difference of the funds needed to cover taxes and insurance. However, you may have the choice to either pay the entire amount in one sum or to spread it out over the following year.

A surplus in your escrow account typically happens if taxes go down or if the original estimate of your payments was too high. If you have a surplus, your lender or mortgage servicer may pay the appropriate amount to cover taxes and insurance bills from the money in your escrow account, and you will usually be refunded the remaining amount.

If you have questions or concerns about your escrow account, you should contact your lender or mortgage servicer. To learn more about home finance topics, check out our helpful guides and FAQs on our Learning & support page.

This content is provided for educational purposes only and is not intended as financial, credit, or lending advice. Clayton Homes does not offer or originate mortgage loans and does not make credit decisions. Financing terms, loan programs, rates, and eligibility requirements vary by lender and may depend on buyer qualifications, property type, and location. Buyers should consult a licensed lender of their choice for information regarding available financing options.