How Escrow Accounts Work on a Mortgage

Your mortgage payment is almost never just principal and interest. For most borrowers, the lender collects property taxes and homeowner’s insurance alongside the loan payment — and holds that money in an escrow account until the bills come due. Understanding how escrow works prevents surprises at closing, at annual escrow review time, and when tax assessments change.

What Escrow Is and Why Lenders Require It

An escrow account is a holding account managed by your mortgage servicer. Each month, a portion of your payment goes into this account to cover property taxes, homeowner’s insurance, and — if your down payment is less than 20% — private mortgage insurance (PMI). When those bills come due, the servicer pays them directly on your behalf. Lenders require escrow on most loans because they have a financial interest in the collateral (your home) staying insured and out of tax lien status. If taxes go unpaid, a tax lien can take priority over the mortgage — a risk lenders eliminate by controlling the payment. FHA loans always require escrow. Conventional loans with less than 20% equity almost always require it. VA loans do not technically mandate escrow but most lenders impose it anyway.

How Your Monthly PITI Payment Breaks Down

PITI stands for Principal, Interest, Taxes, and Insurance. Your lender calculates the annual property tax bill and annual insurance premium, divides each by 12, and adds those amounts to your monthly loan payment. For a home in Montgomery County, PA with a $450,000 purchase price, property taxes might total $6,500 per year ($542/month), and homeowner’s insurance might run $1,800/year ($150/month) — adding $692 to every monthly payment on top of the P&I amount. The servicer keeps a cushion of one to two months’ escrow in the account at all times as a buffer against bill timing. At closing, you typically prepay two to three months of escrow into the account.

Pennsylvania’s Three Tax Bills — and Why Your Escrow Is Higher

Pennsylvania homeowners face three separate property tax bills: county tax, municipal tax, and school district tax. School taxes are typically the largest — often 60–70% of the total tax burden. These three bills do not all come due at the same date, which means your servicer must track multiple due dates and maintain sufficient escrow balance for each. New PA homeowners are sometimes surprised to receive three separate tax bills in their first year — this is normal. Your servicer should be handling all three, but it is worth confirming which bills are covered in your escrow account setup. In Florida, there is no state income tax, but county property taxes are collected once annually (November due date for discount, April for deadline). Servicers escrow Florida property taxes the same way — 1/12th per month.

Escrow Analysis and What Happens When Taxes Change

Once per year, your servicer performs an escrow analysis — a recalculation of your escrow requirement based on actual tax and insurance bills. If your property taxes increased (due to reassessment, a home improvement permit, or county-wide increases), your servicer will raise your monthly escrow collection. If there is a shortfall from the prior year, you will either pay a lump sum to cover it or spread the deficit over 12 months, increasing your payment further. Surpluses above the allowed cushion are refunded to you. Homeowners in rapidly appreciating markets — both PA and FL — have seen meaningful tax increases in recent years, so escrow adjustments are common.

When You Can Waive Escrow

Some lenders allow escrow waiver when your loan-to-value is 80% or less (meaning 20%+ equity). Waiving escrow means you pay taxes and insurance directly, but most lenders charge a fee — typically 0.25% of the loan amount added to your rate or closing costs — for this privilege. It is worth calculating whether the fee is worth the cash flow control. Jumbo lenders and portfolio lenders sometimes waive this fee for strong borrowers.

How a Mortgage Broker Helps You Understand Escrow at Closing

Escrow is one of the most misunderstood parts of a mortgage payment — and one of the most common sources of post-closing surprises. Lena Polnet walks every borrower through the full PITI breakdown before closing, including the escrow pre-load required at settlement. With 28 years of experience and access to 100+ wholesale lenders, she can also identify programs with favorable escrow waiver options for qualified borrowers. Call (215) 364-7171 with questions.

FAQ — Mortgage Escrow Account Explained

Why did my mortgage payment go up even though my rate didn’t change?

Most payment increases are caused by escrow adjustments — specifically rising property taxes or homeowner’s insurance premiums. Your servicer’s annual escrow analysis recalculates the required monthly collection and adjusts your total payment accordingly.

Can I waive my escrow account?

On conventional loans with 20% or more equity, many lenders allow escrow waiver, though a fee of roughly 0.25% of the loan amount is common. FHA loans always require escrow regardless of equity. VA lenders typically require it as well despite no VA mandate.

In Pennsylvania, do I pay one property tax bill or multiple?

Pennsylvania homeowners receive three separate tax bills — county, municipal, and school district. School taxes are typically the largest component. Your escrow account should cover all three; confirm this with your servicer after closing.

Talk to a Mortgage Specialist

Have questions about how escrow works on your mortgage? Call Lena Polnet at (215) 364-7171 or visit dynamicfunding.net. Same-day responses, no sales pressure.

Dynamic Funding Solutions, Inc. — NMLS #17144 | Lena Polnet — NMLS #17225 | Licensed in Pennsylvania and Florida | Equal Housing Lender