An escrow account (sometimes called an impound account depending on where you live) is set up by your mortgage lender to pay certain property-related expenses on your behalf like property taxes and homeowner’s insurance.

Because bills for taxes and insurance can be large and infrequent (typically once or twice per year), many homeowners prefer to pay them in monthly installments along with their mortgage payment.

Many lenders require that you pay your taxes and insurance using escrow, so they can make sure that the bill gets paid and the property is not at risk. Your mortgage servicer will manage the escrow account and pay these bills on your behalf. Sometimes, escrow accounts may also be required by law.

Your property taxes and insurance premiums can change from year to year. Your escrow payment – and with it, your total monthly payment will change accordingly.

Tip: If your loan doesn’t include an escrow account, you will have to plan to pay these large expenses yourself. Be sure you budget for these extra costs and stay current on your taxes and insurance payments.

Warning: If you fail to pay your property taxes, your state or local government may impose fines and penalties or place a tax lien on your home.  You could also face foreclosure.

In addition, if you fail to pay your taxes or insurance, your lender may:

  • Add the amounts to your loan balance
  • Add an escrow account to your loan

Purchase new homeowners’ insurance for you and bill you for it. This lender-purchased insurance, known as force-placed insurance, is typically more expensive than regular homeowners’ insurance. It only protects the lender, not you, in the event of damage to your home.

Tip: Even if your lender does not require an escrow account, consider requesting one voluntarily. An escrow account makes it easier to pay your large property-related bills by paying small amounts with your mortgage payment each month. That way you don’t have to scramble to pay a large property tax bill or insurance premium.