Mortgage Escrows Guidelines on Purchase and Refinance in 2025
When buying or refinancing a home, many borrowers are surprised by the term “mortgage escrows.” If you’re wondering what mortgage escrows are, why lenders require them, or how they affect your monthly payments, you’re not alone. This guide will break down everything you need to know about mortgage escrows.
At Gustan Cho Associates, we believe you should feel confident and informed about your mortgage. That starts with understanding how mortgage escrows work and how they protect both you and your lender.
What Is a Mortgage Escrow?
A mortgage escrow is a dedicated account established by your lender to manage and pay specific home-related expenses on your behalf. These typically include property taxes and homeowners’ insurance; in some cases, they may also cover homeowners’ association (HOA) fees.
Your lender will take part of your monthly mortgage payment and put it into an escrow account. This means you don’t have to handle those bills yourself. When the bills are due, they handle the payments for you. The whole point of having mortgage escrows is to ensure those essential bills are paid on time, so you don’t have to worry about losing your home because of unpaid taxes or insurance lapses.
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Are Mortgage Escrows Required?
The necessity of mortgage escrows largely depends on the type of loan and the equity available in the home. Escrows are required for FHA loans, VA loans, and USDA loans, ensuring that certain costs associated with homeownership are managed appropriately.
You must have a mortgage escrow account if you’re using one of these government-backed loans. It doesn’t matter how much money you put down or how much equity you have. These loan programs require escrows for the life of the loan.
Conventional loans are different. If you put down 20% or more, you can waive mortgage escrows if you prefer to pay taxes and insurance yourself. But many borrowers still keep escrow accounts because it’s easier and reduces the risk of missing a payment.
How Mortgage Escrows Work in 2025
When you close on your home loan, the lender will ask for a few months ‘ worth of property taxes and insurance upfront to kickstart your escrow account. This amount is included in your closing costs.
After closing, you’ll make one total monthly mortgage payment that includes:
- Principal (the amount you borrowed)
- Interest (what the lender charges to lend you the money)
- Taxes (divided monthly)
- Insurance (divided monthly)
This is PITI (Principal, Interest, Taxes, Insurance).
Your monthly payment’s taxes and insurance portion go into your mortgage escrow account. When your insurance or tax payment is due, the lender uses those funds to settle the bills directly.
What Happens If Taxes or Insurance Go Up?
Your lender reviews your escrow account every year during an escrow analysis. If your property taxes or homeowners insurance have gone up, your monthly payment will go up too to cover the higher bills. This helps ensure there’s enough money in your escrow account to make full, on-time payments when they’re due.
If there’s more than enough money in your escrow, your lender may refund or lower your monthly payment.
In 2025, with many counties increasing property taxes and insurance premiums due to inflation and storm damage claims, more homeowners are seeing their escrow payments increase. If this happens to you, it’s not the lender’s fault—they’re just adjusting based on the new bills.
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Can You Cancel Mortgage Escrows Later?
Suppose you start with an escrow account and later reach 20% equity in your home. In that case, you can request an escrow waiver from your lender on a conventional loan. This is impossible for FHA, VA, or USDA loans—those require escrows for the life of the loan.
Your lender may require:
- A good payment history
- A formal request
- A small escrow waiver fee
Always check with your lender before making any decisions about canceling escrows.
Pros and Cons of Mortgage Escrows
Pros:
- No surprise tax or insurance bills
- Easier budgeting with one monthly payment
- Reduced risk of late fees or lapsed coverage
- Required for many low-down-payment loans
Cons:
- Higher monthly payment
- Less control over the timing of payments
- Harder to cancel on government-backed loans
- Possible escrow shortages if taxes or insurance go up suddenly
What Is an Escrow Shortage or Overage?
An escrow shortage happens when your escrow account doesn’t have enough money to cover your bills. Your lender may ask for a one-time payment or increase your monthly payment.
An escrow overage means you paid in more than needed. The lender may refund the excess or reduce your future payments.
What Happens at Closing?
At closing, your lender will usually collect:
- One year of homeowners’ insurance (paid upfront)
- Two to three months of extra homeowners insurance premiums (for escrow cushion)
- Four to six months of property taxes (depending on when taxes are due in your area)
These funds go into your escrow account and help cover the first tax and insurance payments due after you close.
Special Situations in 2025
Due to rising natural disaster risks in 2025, some insurance companies are raising premiums significantly. This has led to larger escrow payments for many homeowners, especially in states like Florida, Texas, and California. Some homeowners may even see lender-placed insurance if they don’t maintain coverage—this is expensive and should be avoided.
Do All Lenders Handle Escrows the Same Way?
Not always. Each lender can have slightly different policies, especially regarding conventional loan escrow waivers, fee amounts, or escrow analysis timing. At Gustan Cho Associates, we have no lender overlays and provide transparent, straightforward guidance about your mortgage escrows and monthly payments.
We work seven days a week to help borrowers nationwide understand every part of the mortgage process, from PITI to escrow refunds.
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Final Thoughts: Should You Choose Mortgage Escrows?
For most borrowers, mortgage escrows are a smart and stress-free option. They help you stay current on your taxes and insurance, which protects your home and credit. Escrows make life easier unless you have strong savings habits and want full control.
If you’re buying or refinancing a home in 2025, Gustan Cho Associates can help you choose the best loan program, with or without escrows.
Need Help With Mortgage Escrows or a Refinance? Call us at 800-900-8569, text us for faster service, or email us at alex@gustancho.com. Our loan officers are available evenings, weekends, and holidays to help you move forward confidently.
Let us show you how easy getting a mortgage can be—with no lender overlays and full support through closing.
Frequently Asked Questions About Mortgage Escrows:
Q: What is a Mortgage Escrow Account?
A: A mortgage escrow is a special account set up by your lender to pay your property taxes and homeowners’ insurance. You send the money as part of your monthly mortgage payment, and your lender ensures the bills are paid on time.
Q: Do I have to have a Mortgage Escrow Account?
A: Yes, it’s required if you have an FHA, VA, or USDA loan. If you have a conventional loan and put down at least 20%, you can skip it. But many people still choose escrows for peace of mind.
Q: How Does My Lender Decide How Much to Collect for Escrow?
A: They divide your yearly property tax and insurance costs by 12 and add that to your monthly mortgage payment. They may also include a small cushion to cover future increases.
Q: What happens if my taxes or insurance go up?
Your lender checks your escrow account once a year. If your bills go up, your monthly mortgage payment will also go up to make sure there’s enough in the account to cover them.
Q: Can I Get Rid of My Escrow Account Later?
A: Yes—if you have a conventional loan and enough equity (usually 20% or more). You’ll also need a good payment history and may have to pay a small fee. But you can’t cancel FHA, VA, or USDA loan escrows.
Q: What is an Escrow Shortage?
A: An escrow shortage means there isn’t enough money in your account to pay your tax or insurance bills. Your lender might raise your monthly payment or ask you to pay the difference.
Q: What is an Escrow Overage?
A: An overage occurs when you pay more than you need. If that happens, your lender might send you a refund or lower your monthly payments.
Q:What Does the Lender Collect at Closing for Escrows?
A: At closing, your lender collects money to start your escrow account. This usually includes one year of homeowners’ insurance, plus a few months’ worth of taxes and insurance as a cushion.
Q: Do All Lenders Handle Escrows the Same Way?
A: Not always. Each lender has their own rules about escrow waivers and fees. At Gustan Cho Associates, we offer flexible options and no lender overlays to make it easier for you.
Q: Should I Keep My Mortgage Escrow or Pay Taxes and Insurance Myself?
A: That depends. Escrow is an excellent option if you like simple, on-time payments. If you’re great at saving and budgeting and have a conventional loan, you might prefer handling it on your own.
This blog about “Mortgage Escrows Guidelines on Purchase and Refinance” was updated on July 24th, 2025.
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