An escrow account — also called an impound account or reserve account — is an account maintained by a mortgage lender or servicer to collect and pay property taxes and homeowners insurance on the borrower's behalf. Each month, the borrower pays one-twelfth of the annual tax and insurance costs as part of their mortgage payment. The lender holds these funds in the escrow account and disburses them when the bills come due — ensuring these critical expenses are always paid on time.
Lenders require escrow accounts to protect their investment. If a borrower fails to pay property taxes, a tax lien takes priority over the mortgage — meaning the government could sell the property to collect unpaid taxes, wiping out the lender's lien. Similarly, if the borrower lets insurance lapse and the house is destroyed, the lender loses its collateral. By collecting and paying these expenses through escrow, the lender eliminates these risks. Escrow accounts are generally required when the loan-to-value ratio exceeds 80%, for all FHA and VA loans, and in some states regardless of LTV.
Federal law under RESPA regulates escrow accounts to protect borrowers. Lenders can collect a cushion of no more than two months' worth of payments beyond what is needed to pay the next bills. Each year, the servicer performs an escrow analysis, comparing the actual disbursements to the amounts collected. If there is a surplus (the servicer collected too much), the borrower receives a refund. If there is a shortage (collected too little), the borrower's monthly escrow payment increases.
At closing, the buyer makes initial deposits into the escrow account as part of their prepaid items and closing costs. The closing disclosure shows exactly how much is being deposited, what bills are being covered, and when the first payments from the account will be made. These initial deposits typically include enough to cover taxes and insurance from the closing date through the next due date, plus the two-month cushion allowed by RESPA.
At Beycome Title, we calculate all initial escrow deposits accurately based on your specific closing date, tax due dates, and insurance renewal dates. We ensure your closing disclosure reflects the correct amounts so there are no surprises. Use our closing cost calculator for an estimate that includes escrow deposits, or get your free personalized quote.