What Is an Escrow Account on a Mortgage? How Salt Lake County Buyers Should Plan

A mortgage escrow account is a holding account your loan servicer uses to pay your property taxes and homeowners insurance for you. Each month, part of your payment goes into the account. When the tax bill or insurance premium comes due, the servicer pays it from that balance. For a Salt Lake County buyer, it turns two large yearly bills into small monthly amounts, but it also means your total payment can change when those bills change.

Charisse Walker is a real estate agent with Chalker Properties Group in Salt Lake and Davis County, Utah, and a licensed mortgage lender. This is general education about how escrow works. It is not a loan offer. Your actual terms, and whether an escrow is required or optional for you, come from your lender and your loan documents.

Not every escrow is the same, so read the one on your own loan estimate.

Lenders often describe the payment with the letters PITI.

• Principal. The part that pays down the loan balance.
• Interest. The cost of borrowing.
• Taxes. Your yearly property tax, split into monthly amounts.
• Insurance. Your homeowners insurance premium, split into monthly amounts.

Some loans add mortgage insurance, and some homes have association dues. Dues are usually paid separately to the association unless your lender says otherwise. Ask your loan officer exactly what your payment includes.

A fixed rate fixes principal and interest. The tax and insurance parts follow the real bills, and those can move.

• Property taxes can change. Assessed values and tax rates are set locally. When a bill rises, the servicer raises the monthly escrow amount.
• Insurance premiums can change. Renewal pricing depends on the insurer, and a new premium changes the monthly share.
• The first year is an estimate. The lender sets the starting amount from the best information at closing. A new home may have been taxed at a lower land-only or prior-owner value.
• A shortage can appear. If the account falls short because bills came in higher, the servicer may ask you to pay the gap and raise future payments.

Servicers send a yearly escrow analysis explaining the change. Read it when it arrives, and check it against the bills.

Sometimes, but not always. Some loan programs require an escrow account. Others allow you to waive it if you meet conditions, such as a larger down payment, and the lender may charge a fee or a higher rate for waiving.

If you waive escrow, you pay taxes and insurance yourself, on time, in full. Many buyers find that harder than it sounds, because the bills are large. Missing one has consequences, including penalties on a tax bill and a lapse in insurance that your lender cares about.

Choose escrow if you want predictability. Consider waiving only if you are disciplined about setting money aside and your lender allows it. Ask for the cost of each choice in writing.

Escrow shows up at closing in two ways. You may fund an initial escrow deposit that starts the account, and you may prepay the first year of homeowners insurance. These are part of your cash to close. Our guide to what Utah buyers should expect at closing shows where they fall.

Your lender's Loan Estimate and Closing Disclosure list these figures. Compare them to each other and ask about anything that changed.

Picture a Salt Lake County buyer who closes in the fall. The first-year escrow estimate is based on the information available at closing. A year later, the servicer's analysis shows the tax bill came in higher than estimated, so the monthly amount goes up and there is a small shortage to pay. The buyer, who had left a little room in the budget, absorbs it without trouble. This is a typical example, not a client story.

The lesson is to treat the first payment as a starting point and keep a margin. If you want to see how much monthly payment fits you, see our note on debt-to-income ratios.

• Budgeting only for principal and interest. Taxes and insurance are real monthly costs.
• Not shopping insurance before closing. The premium drives your escrow. Get quotes early.
• Ignoring the yearly analysis. It explains changes and shortages.
• Not checking the tax bill. If a bill looks wrong, ask the county about it.
• Paying taxes twice. If you have an escrow, the servicer pays the bill. Check before sending money yourself.

Is escrow the same as earnest money? No. Earnest money is your deposit during the purchase. A mortgage escrow account holds money for taxes and insurance after you close.

Do I earn interest on my escrow balance? It depends on the loan terms and state rules. Ask your servicer.

Can I get a refund if there is too much in the account? Servicers generally return large surpluses after the yearly analysis. Check your paperwork for the threshold.

Does escrow include HOA dues? Usually not. Confirm with your lender.

Can I change from escrow to paying myself later? Some lenders allow it under conditions. Ask yours.

Here are the next steps, simplified: ask your lender what your payment will include, get an insurance quote early, review the Loan Estimate line by line, and keep a cushion for yearly changes. For the purchase side, see the first-time buyer page. If you want to talk through financing for your own purchase, contact Charisse here. Loan questions go to your own lender, and she will help you know what to ask.