Mortgage Escrow Account 2026: Required or Optional? Save $200-400/Month
Your lender wants to hold $10K-15K of YOUR money to pay taxes and insurance. But if you have 20% down, you can waive escrow and keep that money earning interest. Here's how.
⚡ Quick Answer: Is Escrow Required?
❌ REQUIRED If:
- • Down payment less than 20%
- • FHA, VA, or USDA loan
- • Lender policy (some require it)
- • High-risk area (flood zone)
✅ OPTIONAL If:
- • Down payment 20%+
- • Conventional loan
- • Good credit (680+)
- • Lender allows waiver
🎯 Compare Lenders: Escrow Waiver Options
Not all lenders allow escrow waivers. Compare lenders to find ones that let you manage your own taxes and insurance:
What Is a Mortgage Escrow Account?
A mortgage escrow account (also called an impound account) is a separate account where your lender holds money to pay your property taxes and homeowners insurance on your behalf.
📐 How It Works:
1. You pay 1/12 of annual taxes + insurance each month
2. Lender holds money in escrow account
3. When bills are due, lender pays them automatically
4. You never see the bills or write checks
Real Example: Monthly Escrow Payment
Scenario: $400,000 home in Texas
- Annual property taxes: $8,000
- Annual homeowners insurance: $2,400
- Total annual: $10,400
Monthly Escrow Payment:
$10,400 ÷ 12 months = $867/month
Your Total Monthly Payment (PITI):
- Principal + Interest: $2,400
- Property Taxes (escrow): $667
- Insurance (escrow): $200
- Total: $3,267/month
Escrow Required vs Optional
| Loan Type | Down Payment | Escrow Required? | Can Waive? |
|---|---|---|---|
| Conventional | 20%+ | Optional | Yes (may cost 0.125-0.25% rate) |
| Conventional | <20% | Required | No |
| FHA | Any | Required | No (FHA rules) |
| VA | 0% | Required | No (VA rules) |
| USDA | 0% | Required | No (USDA rules) |
How to Waive Escrow (Save $200-400/Month)
If you have 20%+ down payment and a conventional loan, you can request an escrow waiver. Here's how:
Requirements to Waive Escrow
- 20% down payment minimum (some lenders require 25%)
- Conventional loan only (not FHA, VA, USDA)
- Credit score 680+ (some lenders require 700+)
- Primary residence or second home (not investment property)
- Lender approval (not all lenders allow waivers)
- Accept 0.125-0.25% higher rate (lender's risk premium)
💡 COST OF WAIVING: Most lenders charge 0.125-0.25% higher interest rate for escrow waiver. On $400K loan, that's $40-80/month extra. But you save $200-400/month by keeping escrow money. Net savings: $120-360/month.
Pros & Cons of Waiving Escrow
✅ PROS of Waiving
- • Earn interest: Keep $10K-15K in HYSA at 4-5% = $400-750/year
- • Control timing: Pay taxes when YOU want
- • No shortages: No surprise payment increases
- • Lower monthly payment: $200-400/month savings
- • Flexibility: Use money for emergencies if needed
❌ CONS of Waiving
- • Discipline required: Must save monthly for bills
- • Late payment risk: Miss tax deadline = lien on home
- • Higher rate: 0.125-0.25% rate increase
- • Large lump sums: $4K-8K tax bills twice/year
- • No autopay: Must remember to pay manually
🎯 Find Lenders That Allow Escrow Waivers
Not all lenders allow escrow waivers. Compare lenders to find the best escrow waiver terms and rates:
Compare Lenders (Escrow Waiver Options)Escrow Cushion: How Much Money Lenders Hold
Lenders don't just hold enough for taxes and insurance. They hold a cushion of 2-3 months extra "just in case."
Example: Escrow Cushion Calculation
- Annual property taxes: $6,000
- Annual insurance: $1,800
- Total annual: $7,800
- Monthly escrow: $650
Cushion Held by Lender:
$650 × 2-3 months = $1,300-1,950 cushion
Total escrow balance: $7,800 + $1,950 = $9,750
This is YOUR money sitting in lender's account earning THEM interest (in most states).
⚠️ THE PROBLEM: In 35 states, lenders don't pay you interest on escrow money. They hold $10K-15K of YOUR money and earn 4-5% interest ($400-750/year) while you earn $0. This is why waiving escrow makes financial sense if you're disciplined.
What Happens with Escrow Shortages?
Escrow shortage = Lender didn't collect enough money (taxes or insurance increased more than expected).
How Shortages Happen
- Property taxes increased 10% (city reassessed value)
- Insurance premium jumped $500 (claims in your area)
- Lender underestimated initial escrow amount
- You removed PMI mid-year (escrow recalculation)
How to Handle Shortage
Example: $1,200 Escrow Shortage
Your taxes increased from $6,000 to $7,200/year. Lender paid $7,200 but only collected $6,000 = $1,200 shortage.
Your Options:
- Option 1: Pay $1,200 lump sum now
- Option 2: Spread over 12 months = $100/month extra
New Monthly Payment:
- Old escrow: $500/month
- New escrow: $600/month (higher taxes)
- Shortage spread: $100/month (if choosing option 2)
- Total increase: $200/month for 12 months
States That Require Interest on Escrow
Only 15 states require lenders to pay interest on escrow accounts:
Interest rates vary by state (typically 0.5-2% annually). If you're in one of these states, escrow is slightly less bad because you earn some interest.
🎯 Ready to Waive Escrow and Save Money?
Compare lenders to find the best escrow waiver terms. Some lenders charge lower rate increases (0.125% vs 0.25%) for waivers:
Frequently Asked Questions
Should I waive escrow if I can?
Yes, if you're disciplined. Waiving escrow saves $200-400/month and lets you earn 4-5% interest on $10K-15K. But you MUST save monthly for tax bills and never miss payments. If you're not disciplined with money, keep escrow for autopay convenience.
Can I remove escrow after closing?
Yes, if you meet requirements (20%+ equity, conventional loan, good payment history). Contact your lender and request escrow removal. May require: 12 months on-time payments, current appraisal showing 20%+ equity, and 0.125-0.25% rate increase. Process takes 30-60 days.
What happens if I don't pay property taxes on time?
Tax lien on your home. County can foreclose after 1-3 years of non-payment (varies by state). Your mortgage lender will find out (they monitor tax records) and may force-place escrow or demand immediate payment. This is why escrow exists - to protect lender's collateral.
Do I get an escrow refund when I sell my home?
Yes! Any remaining escrow balance is refunded to you at closing. Example: You have $3,000 in escrow, sell home in June. Lender refunds $3,000 minus any unpaid taxes/insurance. Refund check arrives 10-20 business days after closing.
Can I choose which insurance company with escrow?
Yes, you choose. Lender doesn't care which insurance company you use (as long as coverage meets requirements). Shop around for best rates. You can switch insurance companies mid-year - just notify lender of new policy details and they'll pay new company.
Meet Michael
Reverse Mortgage & Senior Specialist
Michael Thompson is a leading expert in reverse mortgages and senior financing solutions with 15 years of specialized experience. As a certified HECM specialist, he has helped thousands of seniors access their home equity for retirement planning. His compassionate approach and deep knowledge of FHA reverse mortgage guidelines make him a trusted advisor for families navigating senior housing and financial planning decisions.
EXPERTISE:
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