Mortgage Escrow Accounts: Taxes, Insurance and Shortages
Why your mortgage payment rose when your rate did not: how escrow analysis, the 1/6 cushion, shortages and refunds work, and why NYC co-op loans skip escrow.
7 min read · Updated
A mortgage escrow account is a fund your loan servicer holds to pay your property taxes and insurance for you, and your monthly payment includes a share of those bills. If your payment went up while your interest rate stayed the same, the reason is almost always escrow: your taxes or insurance rose, or last year's account came up short.
Federal rules (Regulation X, enforced by the Consumer Financial Protection Bureau) limit how much a servicer can hold, require a yearly review, and say what happens to shortages and extra money. Here is how it works, with numbers.
At a glance
- Maximum cushion
- 1/6 of a year’s bills
- About two months of escrow payments
- Review
- Once a year
- Annual statement within 30 days of the year’s end
- Surplus of $50+
- Refunded within 30 days
- If your payments are current
- Shortage
- Can be spread over 12+ months
- Smaller ones may be billed in 30 days
- NYC co-op loans
- Usually no escrow
- Taxes are paid by the co-op through maintenance
What goes into escrow
Regulation X describes an escrow account as money held to pay taxes, insurance premiums (including flood insurance) and other charges on the property. For most homeowners that means:
- Property taxes, paid to the city or county when each bill is due.
- Homeowners insurance, paid to your insurer at renewal.
- Flood insurance, if your lender requires it.
- Mortgage insurance on some loans, when it is collected with the payment.
Each month the servicer collects one-twelfth of the estimated yearly total, plus any cushion. When a bill comes due, the servicer pays it from the account. The CFPB notes that because taxes and premiums change from year to year, the escrow part of your payment changes too.
The rules also protect you on the other side: as long as you are not more than 30 days behind, the servicer must pay escrowed bills on time to avoid penalties, even if the account is short. It can advance the money and collect it back later as a deficiency.
The cushion: how much extra a servicer can hold
A servicer may keep a cushion to cover unexpected increases. Regulation X caps it at one-sixth of the estimated total annual disbursements, which works out to roughly two months of escrow payments. A servicer can use a smaller cushion or none, but not a larger one. If your loan papers or state law set a lower limit, the lower limit applies.
The annual escrow analysis
Once a year the servicer compares what it collected with what it paid, projects the next 12 months of bills, and resets your payment. You get an annual escrow statement within 30 days after the end of the escrow computation year. (A servicer does not have to send it if you are more than 30 days overdue, in foreclosure or in bankruptcy.) When the account is first set up at closing, you get an initial escrow statement at closing or within 45 calendar days.
The analysis has three possible results:
| Result | What it means | What the rules allow |
|---|---|---|
| Surplus | The account holds more than it needs for the coming year plus cushion. | $50 or more: refunded to you within 30 days of the analysis. Under $50: refunded or credited against next year’s payments. Only if you are current. |
| Shortage | The balance is positive but below the target balance. | Less than one month’s escrow payment: the servicer may ignore it, ask for it within 30 days, or spread it over at least 12 months. One month or more: ignore it or spread it over at least 12 months. |
| Deficiency | The account went negative because the servicer paid more than it held. | The servicer may ask for it within 30 days or in two or more equal monthly payments, depending on size. Only if you are current. |
The servicer must tell you at least once each computation year if there is a shortage or deficiency. A shortage notice is not a sign you missed a payment. It means the bills rose faster than the estimate.
Why your payment went up when your rate didn't
A shortage hits your payment twice: once because the new year's bills are higher, and again because the servicer spreads last year's gap over the next 12 months. Here is an illustrative example on a fixed-rate loan with principal and interest of $3,160.34 a month ($500,000 at 6.5% for 30 years).
| Item | Last year | This year |
|---|---|---|
| Property taxes (annual) | $9,000 | $10,200 |
| Homeowners insurance (annual) | $1,800 | $2,040 |
| Monthly escrow for bills (total ÷ 12) | $900 | $1,020 |
| Shortage repayment ($1,200 over 12 months) | – | $100 |
| Principal and interest | $3,160.34 | $3,160.34 |
| Total monthly payment | $4,060.34 | $4,280.34 |
The payment rose $220 a month with no change to the loan. Next year the $100 shortage line drops off, so the payment should fall back toward $4,180 if bills stay flat. Try your own numbers in the escrow calculator.
What to do when you get a shortage notice
- 1
Check the bills it used
Compare the projected tax and insurance amounts with your actual tax bill and insurance declarations page. A wrong estimate is the most common fixable error. - 2
Look for a one-time cause
A supplemental tax bill, a lost exemption, a new flood policy or an insurer change can create a shortage that will not repeat. - 3
Choose how to repay
Ask whether your servicer will accept the shortage as a lump sum, which keeps the monthly payment lower, or prefers to spread it over 12 months. - 4
Fix the underlying cost
Shop your insurance at renewal, and make sure you are getting the property tax exemptions you qualify for. - 5
Dispute errors in writing
If the analysis is wrong, send the servicer a written notice of error and keep a copy. You can also file a complaint with the CFPB.
Why NYC co-op loans usually have no escrow
In a co-op you own shares in a corporation, and the corporation owns the building. The city taxes the building, and the co-op pays that tax and passes it on through your monthly maintenance. The IRS confirms the structure: co-op shareholders can deduct their share of the real estate taxes the corporation pays. So there is no individual property tax bill for a lender to escrow.
Federal rules reflect this. Lenders must normally set up escrow for higher-priced first mortgages on a primary home, but Regulation Z exempts loans secured by shares in a cooperative. In practice, a co-op owner budgets for maintenance and their own contents insurance directly. Read more in co-op maintenance vs condo common charges.
Condo owners are different. Each condo unit gets its own tax bill, so condo mortgages often do escrow taxes. If the condo association has a master insurance policy covering all units, Regulation Z does not require insurance escrow for a higher-priced loan, but taxes are still escrowed.
Can you get rid of escrow?
It depends on your loan. Some lenders let borrowers pay taxes and insurance directly. For a higher-priced mortgage loan, Regulation Z says the escrow account can be cancelled only when the loan ends or when you ask no earlier than five years after closing, owe less than 80% of the original value and are not behind on payments.
Paying directly means you need the discipline to save for large bills. The CFPB warns that unpaid property taxes can lead to penalties, a tax lien or foreclosure, and that lapsed insurance can lead the lender to buy expensive force-placed coverage and charge you for it.
Escrow and your taxes
Your escrow deposits are not the same as taxes paid. IRS Publication 530 says you can deduct only the real estate taxes the lender actually paid from escrow to the taxing authority during the year. Use your servicer's year-end statement, not the total you paid in. See the SALT cap explained for the current limit on deducting property taxes.
Related tools
- Escrow calculator: estimate your monthly escrow and cushion.
- NYC property tax estimator: see what drives the tax line.
- Homeowners insurance coverage estimator.
- The true monthly cost of owning in NYC.
Reg X §1024.17 checked: cushion no more than 1/6 of estimated annual disbursements; annual analysis and statement within 30 days of the end of the computation year; surplus of $50 or more refunded within 30 days if the borrower is current; shortage under one month’s payment may be repaid within 30 days or over at least 12 months, shortage of one month or more over at least 12 months; deficiency may be repaid in two or more monthly payments; initial statement within 45 days of settlement; servicer must pay bills on time if borrower is not more than 30 days overdue. Reg Z §1026.35(b): HPML escrow required, exemption for loans secured by co-op shares, condo master-policy insurance exemption, cancellation no earlier than 5 years with conditions. IRS Pub 530: co-op tenant-stockholders deduct their share of the corporation’s real estate taxes; escrowed taxes are deductible only when paid out. CFPB escrow Ask page re-checked (payment changes with taxes/insurance; unpaid taxes can bring penalties, a lien or foreclosure; force-placed insurance is typically more expensive). Worked example figures are illustrative and recomputed by Roofy ($500,000 at 6.5%/30y P&I $3,160.34; $10,800/12 = $900; $12,240/12 = $1,020; totals $4,060.34 and $4,280.34). All URLs re-opened 2026-10-12.
Sources
- Regulation X §1024.17: Escrow accounts · Consumer Financial Protection Bureau (accessed October 12, 2026)
- What is an escrow or impound account? · Consumer Financial Protection Bureau (accessed October 12, 2026)
- Regulation Z §1026.35: Requirements for higher-priced mortgage loans · Consumer Financial Protection Bureau (accessed October 12, 2026)
- Publication 530, Tax Information for Homeowners · IRS (accessed October 12, 2026)
General information, not legal, tax or financial advice. Rules change; confirm with the agency or a professional before you act.