Escrow is one of those words that gets used two different ways in real estate, and both of them confuse buyers. There’s the "in escrow" phase during closing (which is a whole thing), and there’s the escrow account attached to your mortgage.
This post is about the second one. The one that makes your monthly payment bigger than the mortgage-plus-interest calculators told you it would be.
What an escrow account actually is
An escrow account (sometimes called an impound account) is a savings account your lender maintains on your behalf. Every month, when you make your mortgage payment, a chunk goes into escrow. The lender then uses that money to pay:
- Your property taxes.
- Your homeowners insurance.
- Sometimes your HOA dues (rarely).
- Sometimes your mortgage insurance (for certain loan types).
In effect, the lender is bundling your big annual bills into monthly installments, holding the money, and paying the bills for you when they come due.
Why lenders require it
Lenders care about escrow because unpaid property taxes create tax liens that come ahead of the mortgage. If you didn’t pay your property taxes and the county placed a lien, the county would get paid before the bank if the home ever had to be sold.
Similarly, if homeowners insurance lapses and the home burns down, the lender is exposed. Escrow ensures both bills stay current, protecting the lender’s collateral.
In Colorado, most mortgages require escrow. Some conventional loans allow you to waive it if you have enough down payment (typically 20%+) and good credit, but even then, waiving is often a mistake.
PITI — the acronym you’ll hear
Your total monthly payment is often called PITI, which stands for:
- Principal (the loan balance you’re paying down)
- Interest (what the bank charges you for the loan)
- Taxes (your property tax, held in escrow)
- Insurance (your homeowners insurance, held in escrow)
When your lender quotes your monthly payment, they should be quoting PITI. If they’re quoting just P and I, ask for the full number — it can be $400–$800 more per month.
How the amount is calculated
Your lender takes your annual property tax and annual insurance premium, divides each by 12, and adds those to your monthly payment. Simple in principle. The complications come from timing.
At closing, you’ll often be asked to fund the escrow account with 2–3 months of taxes and insurance upfront. This is called an escrow reserve. It’s not extra money you’re losing — it’s your money, held in your account — but it does mean more cash at closing than buyers sometimes expect.
Why your payment might change year to year
This is where buyers get surprised. Even if your interest rate is fixed, your monthly payment can change annually because your escrow amount changes.
The two big drivers:
- Property tax reassessment. Colorado reassesses on a cycle. If your assessed value went up, your property tax went up, and your escrow needs to hold more.
- Insurance premium changes. Homeowners insurance premiums have been climbing in Colorado, particularly in wildfire zones. If your premium goes up, your escrow needs to hold more.
Every year, your lender does an escrow analysis. If they collected too much last year, they refund the difference or apply it to next year’s payments. If they collected too little, they’ll adjust your monthly payment up.
The annual escrow statement
Once a year, you’ll get an escrow statement from your lender. It shows what came in, what went out, and what’s projected for the coming year. Read it. Confirm the property tax and insurance amounts match what you’re actually paying. Errors happen.
If your statement shows a shortage, you can typically pay the shortage in one lump sum (avoiding a payment increase) or spread it across the coming year’s payments (accepting a higher monthly).
Can you skip escrow?
For most Colorado borrowers, no. Even when it’s technically allowed, it’s usually a bad idea. Reasons to keep escrow:
- It forces you to save for taxes and insurance without thinking about it.
- You avoid the discipline problem of accidentally spending your tax savings.
- The lender pays the bills on time; you don’t risk a missed payment.
- For many borrowers, waiving escrow slightly raises the interest rate.
The one reason to consider waiving: if you’re a highly disciplined saver, want to invest the tax and insurance dollars for the year, and are comfortable managing the cash flow yourself. Even then, most of my clients regret it.
Special notes for Colorado buyers
A few Colorado-specific things worth knowing:
- Property tax reassessment cycle. Your escrow will likely change every two years as assessments update.
- Metro district taxes. Homes in newer communities carry higher property tax through metro districts, which flows through escrow.
- Wildfire insurance. Premiums have risen sharply in some zones, and this shows up in escrow. Ask your lender to run your escrow projection with realistic insurance quotes, not lowest-case estimates.
How I’d want you to feel
Clear about what escrow does. Not surprised by the size of your PITI. Aware of what can move your payment year to year. Confident that your lender is running the account well and communicating changes when they happen.
At All Avenue, we walk every buyer through the full PITI math before an offer goes in. If you’re preparing to buy and want to understand your true monthly cost, that’s a conversation I’d love to have.