How it works
An escrow account is a holding account your mortgage servicer manages for you. Each monthly payment includes your principal and interest, plus about 1/12 of your yearly property taxes and homeowners insurance. When your insurance renewal is due, the servicer pays the carrier from the account.
Most lenders require an escrow account for taxes, homeowners insurance and, if required, flood insurance.
Starting the account at closing
When you buy a home, you usually pay your first year's homeowners premium at or before closing. You may also fund the escrow account with a starting cushion, so there's enough to pay the next bills when they come due. These escrow deposits aren't lender fees. They're your money, set aside for your own bills.
The yearly escrow analysis
Once a year, your servicer reviews the account. It compares what it collected with what it paid out, then sets your payment for the next year.
If your premium rose, your monthly payment may go up, and you may owe a shortage. If it went down, your payment may drop, and you may get a refund of any surplus.
If your premium rises
Premiums can rise at renewal because of higher rebuild costs, claims in your area or changes to your home. Because escrow is reviewed once a year, a mid-year increase may not show up in your payment right away, which can lead to a shortage later.
Shopping your coverage at renewal can help. Compare quotes with the same coverage, limits and deductibles.
If you switch carriers
Tell your servicer so it pays the right company. Send your new declarations page, which shows the carrier, policy number, coverage and premium. Then cancel the old policy only after the new one is in place, so there's no gap.
If your old carrier refunds unused premium, the refund may come to you or to your escrow account, depending on how the policy was paid. Ask your servicer how it handles it.
If coverage lapses
Your mortgage requires the home to be insured. If your policy lapses, your servicer may buy force-placed insurance and charge it to your escrow. It usually costs much more and may protect only the lender's interest, not your belongings or liability. Watch for any notice from your servicer or carrier about a missed payment or cancellation.
