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Escrow can seem like one of the more confusing parts of your home loan, but it generally boils down to a few key parts. One of these is your escrow account’s minimum required balance. Here’s an overview of what it is and why it can be helpful.
Key Topics
What is an escrow account?
First, let’s review what your escrow account is for. Escrow is like a checking account that your mortgage servicer (the company that you send your mortgage payment to) uses to save money to pay your property taxes and insurance premiums. To fund your escrow account, a portion of your mortgage payment is set aside each month for your estimated property tax and insurance bills.
This helps you have a consistent payment each month rather than a few big expenses throughout the year. (Escrow accounts are sometimes also referred to as an impound account, especially in California.)
With an escrow account, you have peace of mind knowing that these important payments will be paid by your servicer, when the bill comes due. As an added safeguard, escrow accounts have minimum required balances to help ensure they build enough funds throughout the year.
- For more on how escrow payments are calculated, see our article Let’s Talk Escrow: What Is Escrow Analysis?
- For more on how servicers use your escrow account, see our Help Center article When We’ll Pay Your Property Taxes.
What is a minimum required balance?
In short, it’s the lowest positive balance allowed in your escrow account at any given time. Typically, it’s twice your monthly escrow payment—not including mortgage insurance. For example, if your escrow payment is $500 a month, your servicer may require a minimum balance of $1,000 in your escrow account at all times throughout the year as property taxes and insurance bills are paid out.
As with any account, having a bit of a “cushion” in your escrow account won’t hurt—in fact, many servicers will require it. This can help you avoid an escrow shortage when your bills are due.
Over and above that, state and federal laws, along with your loan agreement, place limits on just how much cushion lenders can require in your escrow account.
When are you required to have an escrow account?
Whether you’re required to have an escrow account will depend on your loan and your lender. According to the Consumer Financial Protection Bureau, “many lenders require that you pay your taxes and insurance using escrow, so they can make sure that the bill gets paid.” In some cases, they may also be required by law.
Escrow accounts may also be a required part of a loan agreement or loan modification. This will be clearly stated in the documents you review and sign during the closing of your home loan. If required by your lender and loan agreement, an escrow account will be set up for you.
Additionally, your servicer may add an escrow account to your loan to pay delinquent property taxes or purchase homeowners insurance in the case of a lapse or deficiency. Escrow added for these reasons cannot be removed later.
Additional resources
Have more questions about your escrow account?
- Access our chat feature for quick answers: Chat is available on our main website, www.mrcooper.com, in locations such as our Help Center.
- Live agents are available during business hours (Monday – Thursday, 7 a.m. – 8 p.m. (CST) and Friday, 7 a.m. – 7 p.m.).
- Our virtual assistant is available 24/7.
- Contact us from your online account: Sign in to reach a live agent or to leave a message in our secure Message Center. For the best chat experience, please sign in first. If you need one, you can create an online account here.
- Go to the Escrow Analysis page in your online account.
- Visit the “Escrow, Taxes, & Insurance” page in our Help Center.
- Check out our Mortgage Minute videos on escrow and more.
