What is escrow in a mortgage? It's money held by a neutral party and paid out only for a specific purpose, and you'll run into it twice. Before closing, the escrow agent named in your Texas purchase contract (often the title company) holds your earnest money and closing funds. After closing, a mortgage escrow account (also called an impound account) collects part of each monthly payment so your servicer can pay your property taxes and homeowners insurance when the bills come due. Federal rules under RESPA, in 12 CFR 1024.17, limit how much a servicer can collect for that account and require a yearly review.
I'm Taylor Ring, a Mortgage Loan Officer with Fairway Independent Mortgage Corporation (The Wood Group) in Belton. "Why did my payment go up?" is one of the most common calls I get from homeowners in Temple, Killeen, and Waco, and the answer is almost always escrow. Everything below comes from the CFPB, the federal escrow regulation, TREC's resale contract, the Texas Department of Insurance, HUD, and Fannie Mae, read October 24, 2026.
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The Two Meanings of Escrow
| Escrow at closing | Mortgage escrow account | |
|---|---|---|
| When | From contract to closing | From closing for the life of the loan (or until it's removed) |
| Who holds the money | The Escrow Agent named in your contract | Your mortgage servicer |
| What it holds | Earnest money, option fee, and closing funds | Monthly deposits for property taxes, homeowners insurance, and certain other charges |
| Main rules | TREC contract terms | RESPA, 12 CFR 1024.17, and your loan program |
Escrow at a Texas Closing
Earnest Money and the Escrow Agent
On the TREC One to Four Family Residential Contract (Resale), form 20-19, Paragraph 5 says that within 3 days after the Effective Date, the buyer delivers the earnest money and option fee to the Escrow Agent named in the contract, payable to the Escrow Agent, not the seller. Paragraph 18 adds that the Escrow Agent:
- Is not a party to the contract and isn't liable for either side's performance
- Isn't liable for interest on the earnest money
- Isn't liable for a bank failure unless the bank itself is acting as Escrow Agent
At closing, Paragraph 18B says the earnest money is applied first to your cash down payment, then to your expenses, and any excess is refunded to you. My guides to earnest money in Texas and the Texas option period and option fee walk through the deadlines.
What the Settlement Agent Does
The CFPB explains that a settlement agent coordinates the closing, collects money from the parties, and disburses it under the sales contract and loan terms. The settlement agent is often a title company or escrow company, and after signing, the closing company submits the deed and mortgage documents to be recorded. The CFPB notes that in some states the escrow officer and closing agent are separate roles, and in others the closing agent handles the funds.
Texas-specific cost note: the Texas Department of Insurance says the Texas title premium includes the title search, the title examination, and closing the transaction. TDI also says most title companies add extra charges for things like tax certificates and escrow fees, recording fees, and delivery, and that escrow fees differ between agents, so you can shop. My closing costs in Texas guide has the full breakdown.
Property Taxes Are Prorated at Closing
Paragraph 13 of the TREC resale contract prorates the current year's taxes through the Closing Date, and the proration "may be calculated taking into consideration any change in exemptions that will affect the current year's taxes." If the actual bill differs, the parties adjust when the tax statements come out. This matters for escrow because Texas property tax bills typically go out in the fall and are due by January 31, so your new escrow account often makes the first full tax payment for the year you bought.
What a Mortgage Escrow Account Is
The CFPB defines it as an account your lender sets up to pay certain property-related expenses. Part of every monthly payment goes into it, and your servicer pays the bills for you instead of you paying a big bill once or twice a year.
What it typically pays:
- Property taxes
- Homeowners insurance premiums
- Flood insurance, if required
- Mortgage insurance in some cases. Fannie Mae says escrow deposits for borrower-purchased mortgage insurance premiums are mandatory. See how to remove PMI and FHA mortgage insurance in Texas.
Your monthly payment then has two parts: principal and interest, plus the escrow amount. The escrow part moves when your taxes or insurance move.
Is an Escrow Account Required?
It depends on the loan:
- Many lenders require it. The CFPB says many lenders require escrow for taxes and insurance so they know the bills get paid, and sometimes escrow is required by law.
- Higher-priced loans: the CFPB says a loan that's "higher-priced" under the Truth in Lending Act may require escrow for at least the first five years.
- FHA loans: HUD's regulation at 24 CFR 203.23 requires monthly payments toward taxes, special assessments, and hazard and required flood insurance, held in escrow. See FHA loan requirements in Texas.
- Conventional loans sold to Fannie Mae: the Selling Guide says lenders may waive escrow on an individual first mortgage unless the law requires it, but not for mortgage insurance premiums or certain refinances where taxes are financed. A lender's waiver policy can't rest on loan-to-value alone; it has to consider whether you can handle the lump-sum tax and insurance bills.
Even when it's optional, the CFPB suggests considering escrow voluntarily so you don't have to scramble for a large tax bill. If you skip escrow and miss a tax or insurance payment, the CFPB says your lender may add the amount to your loan, add an escrow account, or buy force-placed insurance, which is typically more expensive.
RESPA Escrow Rules: Cushion, Analysis, Shortage, and Surplus
For a federally related mortgage loan, 12 CFR 1024.17 sets the limits.
At Closing: The Initial Deposit
The servicer can collect enough at closing that the account's lowest projected month-end balance is zero, plus a cushion of no more than one-sixth of the year's estimated escrow payments. The CFPB describes that cushion as two months' worth of estimated disbursements. The servicer must give you an initial escrow account statement at closing or within 45 calendar days of closing, itemizing the estimated taxes, insurance, and other charges.
Every Month
The servicer can collect one-twelfth of the total annual escrow payments it reasonably expects to make, plus enough to keep the cushion at no more than one-sixth of the annual total.
Every Year: The Escrow Analysis
The servicer must analyze the account at least once a year and send an annual escrow account statement within 30 days after the end of the escrow computation year. The statement shows the past year's activity and a projection for the next year. The regulation defines three outcomes:
- Surplus: the balance is more than the target balance
- Shortage: the balance is less than the target balance
- Deficiency: the account has a negative balance
What Happens With a Surplus or Shortage
| Result of the analysis | What the servicer may do |
|---|---|
| Surplus of $50 or more | Must refund it within 30 days of the analysis, if you're current |
| Surplus under $50 | Refund it or credit it toward next year's escrow |
| Shortage less than one month's escrow payment | Leave it, ask you to repay within 30 days, or spread it over at least 12 months |
| Shortage of one month's escrow payment or more | Leave it, or spread it in equal monthly payments over at least 12 months |
| Deficiency less than one month's escrow payment | Leave it, ask you to repay within 30 days, or spread it over 2 or more months |
"Current" means the servicer received your payments within 30 days of the due date. The servicer must also tell you about a shortage or deficiency at least once a year.
The servicer has to pay on time. As long as your payment isn't more than 30 days overdue, 1024.17(k) requires the servicer to pay escrow bills on or before the penalty deadline, advancing its own money if needed.
Why Your Mortgage Payment Changes
The CFPB lists the common reasons: your property taxes or homeowners insurance changed, a temporary buydown ended, an adjustable rate reset, an interest-only period ended, your mortgage insurance changed or was canceled, you were charged new fees, or the servicer made a mistake. For escrow, the Texas-specific triggers I see most:
- Your first full tax bill. If you bought from a seller with a homestead or over-65 exemption, or bought a home that was valued as partly built on January 1, your first bill at full value can be higher than the estimate built from last year's numbers.
- Your own homestead exemption kicks in. After you file, your taxable value can drop, which can create a surplus at the next analysis. See how to file a homestead exemption in Texas.
- New appraised values. Appraisal districts mail notices each spring, and a protest can change your value. My county guides cover each office: Bell, Williamson, McLennan, and Coryell.
- Insurance renewals. A higher premium at renewal flows straight into escrow.
- A buydown ending. That's a principal-and-interest change, not escrow, but it often lands at the same time. See 2-1 buydowns in Texas.
Hypothetical Escrow Shortage Example
Made-up round numbers for illustration only. Cushion amounts and exact analysis dates are left out to keep it simple.
| Line | Amount |
|---|---|
| Estimated annual taxes and insurance at closing | $4,800 |
| Monthly escrow deposit (one-twelfth) | $400 |
| Actual annual taxes and insurance after the first full year | $5,400 |
| Shortage found at the annual analysis | $600 |
| New monthly escrow deposit ($5,400 / 12) | $450 |
| Shortage spread over 12 months ($600 / 12) | $50 |
| New monthly escrow payment | $500 (up $100 from $400) |
If the shortage is a month's escrow payment or more, as $600 is here, the servicer can't demand a lump sum; it can only leave it or spread it over at least 12 months. Ask your servicer which repayment options it offers.
If Something Looks Wrong With Your Escrow
The CFPB's advice is to contact your servicer right away and, if needed, send a written information request or notice of error. Warning signs include a payment change without notice of a tax or insurance change, force-placed insurance, or a notice from your tax office that taxes weren't paid. If your servicer missed a tax payment, contact the tax office or insurer quickly. The CFPB lists the HOPE Hotline at (888) 995-4673 and its own complaint line at (855) 411-2372.
Where escrow shows up before closing: your Loan Estimate, which the lender must send within three business days of your application, shows estimated taxes and insurance. Your Closing Disclosure, delivered at least three business days before closing, shows the final loan terms, projected monthly payments, and closing costs.
Frequently Asked Questions
What is escrow in a mortgage?
Escrow in a mortgage means money held by a neutral party for a specific purpose. Before closing, an escrow agent such as a title company holds your earnest money and closing funds. After closing, a mortgage escrow account collects part of each monthly payment so your servicer can pay property taxes and homeowners insurance when they are due.
What does a mortgage escrow account pay for?
A mortgage escrow account usually pays property taxes and homeowners insurance premiums, plus flood insurance if it is required. On some loans it also pays mortgage insurance; Fannie Mae requires escrow for borrower-purchased mortgage insurance premiums. Your servicer collects one-twelfth of the estimated yearly total each month.
How much of a cushion can my servicer keep in escrow?
Under the federal escrow rule at 12 CFR 1024.17, a servicer can keep a cushion of no more than one-sixth of the estimated total annual escrow payments, which the CFPB describes as two months' worth of estimated disbursements. The servicer must review the account at least once a year and send an annual escrow statement.
Why did my escrow payment go up?
The most common reason is that your property taxes or homeowners insurance went up, which can leave a shortage at the annual escrow analysis. In Texas, a first full tax bill without the previous owner's exemptions, a new appraised value, or an insurance renewal often causes it. A shortage of one month's escrow payment or more must be spread over at least 12 months if the servicer collects it.
What happens to an escrow surplus?
If the annual escrow analysis shows a surplus of 50 dollars or more and you are current on your payments, the servicer must refund it within 30 days. If the surplus is less than 50 dollars, the servicer can refund it or credit it toward next year's escrow payments.
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Related Guides
- Closing Costs in Texas
- Earnest Money in Texas
- How to File a Homestead Exemption in Texas
- How to Remove PMI
- Bell County Appraisal District Guide
- How Much House Can I Afford in Texas?
Sources
- CFPB: What is an escrow or impound account?, Is there a limit on how much my lender can make me pay into escrow?, Why did my monthly mortgage payment go up or change?, Problems with my escrow account, the mortgage closing process, who you'll see at closing, What is a Loan Estimate?, and What is a Closing Disclosure?
- 12 CFR 1024.17, Escrow accounts (Regulation X, RESPA)
- HUD regulation 24 CFR 203.23
- Fannie Mae Selling Guide B2-1.5-04, Escrow Accounts
- TREC One to Four Family Residential Contract (Resale), form 20-19, Paragraphs 5, 13, and 18
- Texas Department of Insurance title insurance FAQs
Taylor Ring, NMLS #2809683 | Fairway Independent Mortgage Corporation, NMLS #2289 | The Wood Group of Fairway, 127 Lake Rd Ste 300, Belton, TX 76513 | Equal Housing Opportunity. This is not a commitment to lend. All loans are subject to credit and property approval and program guidelines, and approval, rates, and program availability are not guaranteed. No interest rates are quoted in this article. This article is general information, not legal or tax advice, and is not affiliated with or endorsed by the CFPB, HUD, Fannie Mae, TREC, TDI, or any government agency.