Escrow Accounts Explained: How Mortgage Escrow Works
Everything you need to know about mortgage escrow accounts—how they work, what they include, escrow analysis, and whether you can waive escrow in New Jersey.
Expert guidance from Jimmy Joseph MBA | NMLS #1577754
What is an Escrow Account?
An escrow account (also called an impound account) is a separate account maintained by your mortgage servicer to collect and pay property-related expenses on your behalf. Think of it as a savings account where you gradually set aside money for large annual or semi-annual bills.
Here's how it works: Each month, a portion of your mortgage payment goes into the escrow account—typically 1/12 of your annual property tax and homeowners insurance costs. When these bills come due, your lender pays them directly from your escrow account. You never have to worry about missing a tax deadline or insurance renewal.
For Bergen County homeowners facing property taxes of $12,000-$25,000 per year, escrow accounts provide convenience and peace of mind. Instead of scrambling to pay $6,000-12,000 tax bills twice per year, you spread the cost evenly across 12 monthly payments.
Bergen County Escrow Example
Home value: $600,000 (Ridgewood)
Annual property taxes: $18,000
Annual homeowners insurance: $2,400
Total annual escrow needs: $20,400
Monthly escrow payment: $1,700 ($20,400 ÷ 12)
This $1,700 is added to your principal & interest payment each month.
What's Included in Escrow?
Property Taxes (Always Included)
Your town and county property taxes are always included in escrow. In Bergen County, these are typically paid quarterly, semi-annually, or annually depending on your municipality.
Bergen County tax examples: Ridgewood ($18K/year), Paramus ($12K/year), Fair Lawn ($10K/year)
Homeowners Insurance (Always Included)
Your homeowners insurance premium is escrowed and paid annually to your insurance company. Lenders require this to protect their investment in case of fire, storm damage, or other covered perils.
Bergen County typical cost: $1,500-$3,500/year depending on home value and coverage
HOA Fees (If Applicable)
If you live in a condo or community with homeowners association fees, some lenders include these in escrow. However, many HOAs prefer direct payment from homeowners.
Note: Not all lenders escrow HOA fees. Check your loan documents.
Flood Insurance (If Required)
If your property is in a FEMA-designated flood zone, flood insurance is required and will be included in escrow. Parts of Bergen County near rivers (Hackensack River, Passaic River) may require flood coverage.
Cost: $400-$3,000+/year depending on flood zone and coverage level
Mortgage Insurance (PMI/MIP)
If you have private mortgage insurance (PMI) or FHA mortgage insurance premium (MIP), this is typically included in your monthly payment but handled separately from the escrow account. It's paid directly to the insurer, not held in escrow.
Learn more about mortgage insurance →How Escrow Payments Work
Your monthly escrow payment is calculated by estimating your annual property taxes and insurance, then dividing by 12. Here's the step-by-step process:
Lender Estimates Annual Costs
At closing, your lender reviews recent tax bills and insurance quotes to estimate your annual costs. They calculate the monthly escrow payment needed.
You Pay Monthly Into Escrow
Each month, 1/12 of your estimated annual taxes and insurance is added to your mortgage payment and deposited into the escrow account.
Lender Pays Bills When Due
When property tax bills arrive (quarterly or semi-annually in most Bergen County towns) and insurance premiums are due, your lender pays them directly from the escrow account on your behalf.
Annual Escrow Analysis Adjusts Payment
Once per year, your lender performs an escrow analysis to compare actual costs vs. estimates. If taxes or insurance increased, your monthly payment increases. If they decreased, your payment decreases or you get a refund.
Sample Monthly Payment Breakdown
$600,000 Bergen County home, 20% down, 6.5% rate, 30-year mortgage:
- • Principal & Interest: $3,027
- • Property Taxes: $1,500 ($18,000/year ÷ 12)
- • Homeowners Insurance: $200 ($2,400/year ÷ 12)
- • Total Monthly Payment: $4,727
Understanding Escrow Analysis
Every year, your lender is required to perform an escrow analysis—a detailed review comparing the money collected vs. money paid out for taxes and insurance. This ensures your escrow account stays properly funded.
Three Possible Outcomes
Escrow Shortage
You didn't collect enough money to cover actual costs. This happens when property taxes or insurance premiums increase.
What happens:
- • Monthly payment increases to cover higher costs
- • May need to pay shortage amount over 12 months
- • Or pay shortage in lump sum
Escrow Surplus
You collected more than needed. This happens when taxes/insurance decrease or you overpaid initially.
What happens:
- • Refund if surplus > $50
- • Applied to next year's escrow if < $50
- • Monthly payment decreases
Balanced Escrow
Actual costs matched estimates closely. Your escrow account has the right amount.
What happens:
- • No change to monthly payment
- • No refund or shortage
- • Continue same payment
Escrow Cushion
Lenders are allowed to maintain a cushion of up to 2 months' worth of escrow payments to ensure sufficient funds for unexpected increases. For example, if your monthly escrow payment is $1,500, the lender can keep up to $3,000 cushion in your account.
This cushion protects against mid-year tax increases or insurance premium spikes. If your cushion exceeds the 2-month maximum, you'll receive a refund during the escrow analysis.
Bergen County Escrow Challenges
Property Tax Increases: Bergen County towns frequently increase property taxes due to school budgets and municipal costs. Annual increases of 2-5% are common, leading to escrow shortages.
Example: Your Ridgewood property taxes were $17,000 when you closed, but increased to $18,500 the next year. Your escrow analysis will show a $1,500 shortage ($125/month shortfall). Your new monthly payment increases by ~$250/month to cover the shortage over 12 months PLUS the higher tax amount going forward.
Can You Waive Escrow in New Jersey?
Yes, you can waive escrow on conventional loans in New Jersey, but there are requirements and trade-offs to consider.
Escrow Waiver Requirements
- Minimum 20% equity required: LTV must be 80% or lower (some lenders require 75% or 70%)
- Conventional loans only: FHA, VA, and USDA loans typically require escrow
- Lender approval: Not all lenders allow escrow waivers; some charge a fee
- Rate increase: Some lenders add 0.125%-0.25% to interest rate if you waive escrow
Pros & Cons of Waiving Escrow
Pros of Waiving Escrow
- Lower monthly payment: No escrow portion, just principal & interest
- Control your money: Earn interest on tax/insurance savings until bills are due
- Flexibility: Choose when and how to pay taxes (quarterly vs annually)
- No escrow shortages: Never receive surprise payment increases from escrow analysis
Cons of Waiving Escrow
- Large lump sum payments: Must pay $6K-12K+ when taxes due (Bergen County)
- Risk of missing payments: You're responsible for remembering tax/insurance deadlines
- Requires discipline: Must save monthly for upcoming bills or face budget stress
- Potential rate increase: Some lenders charge 0.125-0.25% higher rate
Should You Waive Escrow?
Waive escrow if you:
- • Have strong financial discipline and budgeting skills
- • Want to earn interest on savings until bills are due
- • Prefer controlling when you pay large expenses
- • Can comfortably handle $10,000-$20,000+ lump sum payments in Bergen County
Keep escrow if you:
- • Prefer the convenience of automatic payments
- • Don't want to worry about large lump sum bills
- • Like predictable monthly budgeting
- • Have had issues managing large irregular expenses in the past
Questions About Escrow Accounts?
Get personalized guidance on escrow accounts, waiver options, and escrow analysis. Free consultation for Bergen County homeowners.
Expert guidance from Jimmy Joseph MBA | NMLS #1577754
Master Your Mortgage Escrow
Whether you're buying, refinancing, or managing escrow challenges, Jimmy Joseph MBA at CMG Home Loans provides expert guidance tailored to Bergen County homeowners.
NMLS #1577754 | Branch NMLS #2477715
Licensed Mortgage Loan Originator serving Bergen County, NJ