An escrow account, also called an impound account, is a separate account your mortgage servicer uses to pay your property taxes and homeowners insurance. Each month, part of your mortgage payment goes into it, and the servicer pays the bills when they are due. It means you never face a large tax bill on your own, and it is why your mortgage payment can change even on a fixed-rate loan.
Two different meanings of "escrow"
In Arizona, "escrow" also means the title and escrow company that handles your purchase and closing. That is a different thing. This page is about the escrow account that stays with your loan after closing. See Escrow Timeline in Arizona for the purchase process.
When an escrow account is required
- FHA, VA and USDA loans require one.
- Conventional loans generally require one when you put less than 20% down. With more equity, some lenders allow you to waive it, sometimes for a pricing adjustment.
- Flood insurance, where required, is usually escrowed too.
Even when optional, many borrowers keep it because it makes budgeting automatic.
How it is funded at closing
At closing you pay two related items:
- Prepaids: the first year of homeowners insurance, paid in full.
- Initial escrow deposit: enough months of taxes and insurance that the account can pay the next bills on time, plus a cushion. Federal rules limit the cushion, generally to no more than two months of escrow payments.
How many months depends on when you close relative to the tax due dates. Arizona property taxes are paid in two halves, due in the fall and spring. See Arizona Property Taxes for Home Buyers. Both of these show on your Loan Estimate in sections F and G. See How to Read a Loan Estimate.
The annual escrow analysis
Once a year, the servicer reviews the account: what came in, what went out, and what next year's bills will likely be. Then:
- Surplus: if the account holds more than needed beyond the allowed cushion, you may receive a refund when it exceeds a small threshold.
- Shortage: if taxes or insurance rose, the account will run short. You can usually pay the shortage in a lump sum or spread it over the next twelve months.
- Payment change: your monthly escrow amount is reset for the coming year.
Why payments jump in year two
Three common Arizona reasons:
- New construction. The first tax bill may reflect land value only. When the completed home is assessed, the bill can rise sharply, and the escrow account was funded on the low number.
- Insurance renewals. Premiums have been rising, and roof age and claims history matter.
- Seller's exemptions. The tax figure used at closing may reflect the seller's situation, not yours.
Ask your lender what tax figure they used and whether it reflects the completed home. Budget for the real number from the start.
Can you pay taxes and insurance yourself?
Sometimes. Waiving escrow on a conventional loan typically requires enough equity and may carry a cost. If you do, set aside the monthly amount yourself. Missing a tax or insurance payment can trigger force-placed coverage or a lien, both far more expensive than an escrow account.
Why ask me
- I answer the question before I sell you anything. If renting, waiting or a different program is the better move, I will say so.
- Real numbers, not a calculator guess. I price your actual scenario, side by side, with the fees on the page.
- Every program under one roof. Conventional, FHA, VA, jumbo, and non-QM options like bank statement, DSCR and asset-based loans, so the program fits you instead of the other way around.
- You talk to the principal. Ricky Khamis is President of EPiQ Lending, NMLS #173141, lending in Arizona since 1999 and a 2025 Presidents Club Winner at CMG Home Loans. Direct line: (480) 999-9842.
EPiQ Lending is NMLS #1936984, at 7975 N. Hayden Road, Suite A-101 in Scottsdale. Verify all of it before you trust any of it: Ricky's EPiQ Lending profile, the Scottsdale branch, and the license itself at NMLS Consumer Access. Hold every lender to that standard, including us.
More plain-English answers in the Mortgage Education library.
Equal Housing Opportunity. This is general information, not a commitment to lend or an offer to extend credit. Program guidelines, eligibility requirements and documentation standards vary by investor and change over time. Rates, terms and program guidelines change and depend on credit approval, property appraisal and other qualifying factors. Not all applicants will qualify. This is not legal or tax advice; consult a qualified professional about your own situation.
Find out which program actually costs you less
FHA, conventional and jumbo price the same borrower very differently once the mortgage insurance is compared across the years you will own the home. Tell me the shape of your file and I will run them side by side.
Looking at a specific home? Send me the address and I will run the numbers: rickykhamis.com/analyze
