Most mortgages require property taxes and insurance to be paid via escrow — lender collects 1/12 of annual costs with each monthly payment and pays the bills on your behalf. The surprise is the initial escrow deposit at closing: 2-14 months of taxes depending on when in the tax cycle you close. Closing in October with taxes due in December can mean a massive escrow deposit.
Worked example: $425,000 home with 1.2% property tax = $5,100/year = $425/mo into escrow. Close in October, taxes due December 15, lender wants 2-month cushion = initial escrow deposit of $5,100 × 14/12 ≈ $5,950 at closing.
How escrow works month-by-month
Each month your payment includes 1/12 of annual property tax + 1/12 of annual insurance + any PMI. The escrow account grows through the year, then the lender pays the tax bill (semiannually or annually depending on jurisdiction) and the insurance renewal. A 2-month cushion is allowed by RESPA.
When escrow is optional
Conventional loans with 20%+ down typically allow you to waive escrow for a 0.25% fee (about $80/mo on a $400K loan). FHA, VA, USDA require escrow. High-income borrowers who are disciplined about paying tax and insurance themselves save the fee and earn interest on the reserve. Most people benefit from the forced-saving of escrow.
Escrow analysis and shortages
Each year the servicer does an escrow analysis. If taxes went up (reassessment, new levy), your monthly escrow payment rises and you may have an escrow shortage to repay over 12 months. This is the #1 source of surprise payment increases.