Higher-Priced Mortgage Escrow Rule: The 5-Year Minimum

Published by the Modern Lending Solutions editorial team. Last reviewed: October 30, 2026.

Short answer: if a closed-end home loan secured by a first lien on your principal home is a “higher-priced mortgage loan”, the lender generally must set up an escrow account before closing to pay property taxes and the insurance it requires. The account must stay in place until the loan ends, or until you ask to cancel it at least five years after closing, and even then only if you owe less than 80 percent of the home’s original value and are not behind on payments. Some loans and some smaller lenders are exempt. This page covers federal law only; other rules may apply where you live. It is general information, not legal or financial advice.

What makes a loan higher-priced

Under Regulation Z, a higher-priced mortgage loan is a closed-end consumer loan secured by your principal home whose annual percentage rate (APR) exceeds the average prime offer rate (APOR) for a comparable loan, on the date the rate is set, by at least these amounts (12 CFR 1026.35(a)(1), eCFR, text up to date as of October 28, 2026, read October 30, 2026):

Loan	APR above the APOR by
First lien, loan amount at or under the Freddie Mac purchase limit	1.5 or more percentage points
First lien, loan amount over that limit (a “jumbo” loan)	2.5 or more percentage points
Subordinate lien	3.5 or more percentage points

The APOR is a rate derived from average rates, points and other terms offered to low-risk borrowers, published in a table updated at least weekly (1026.35(a)(2)). The CFPB explains the same three tiers and lists the extra protections, including an escrow account for at least five years in some cases (CFPB, last reviewed September 11, 2024, read October 30, 2026; this page may be out of date). The escrow rule covers first liens only.

What the escrow must cover

The lender may not make a first-lien higher-priced mortgage loan on your principal home unless an escrow account is set up before closing for property taxes and the premiums for mortgage-related insurance the lender requires, such as insurance against loss of or damage to the home, liability insurance, or mortgage insurance (1026.35(b)(1)). “Escrow account” has the meaning in Regulation X (12 CFR 1024.17), which also limits how much a servicer may collect. For how a servicer handles a shortage, see mortgage escrow account shortage.

If your home is in a condominium, planned unit development or similar community whose governing association must keep a master insurance policy on all dwellings, the escrow need not include insurance (1026.35(b)(2)(ii)). The official comments say property taxes must still be escrowed in that case (Supplement I, comment 35(b)(2)(ii)-1, eCFR).

Loans the rule does not cover

An escrow account need not be set up for these (1026.35(b)(2)(i)):

A loan secured by shares in a cooperative.
A loan to finance the initial construction of a home. The official comments say the permanent loan that replaces it may still be covered, and the five-year period then runs from the conversion (comment 35(b)(2)(i)-1).
A temporary or “bridge” loan with a term of twelve months or less.
A reverse mortgage covered by 1026.33.
A PACE transaction (1026.35(b)(2)(i)(E)); see PACE financing rules.

Some smaller lenders are also exempt if they meet every condition in the rule at closing. One exemption (1026.35(b)(2)(iii)) requires, among other things, that the lender made at least one first-lien loan on a property in a rural or underserved area in the prior year, stayed under set limits on loans sold and on total assets, and does not keep escrow accounts for loans it now services, with narrow exceptions. Another (1026.35(b)(2)(vi)) applies to some insured banks and credit unions under an asset limit that made no more than 1,000 first-lien loans on principal homes in the prior year. Neither exemption applies if, at closing, the loan is already committed to be bought by someone who does not qualify (1026.35(b)(2)(v)).

When the account may be cancelled

A lender or servicer may cancel a required escrow account only at the earlier of the end of the loan, such as by payoff, refinance or foreclosure, or its receipt of your request made no earlier than five years after closing (1026.35(b)(3)(i), comment 35(b)(3)-1). Even after five years, it may not cancel on your request unless both are true (1026.35(b)(3)(ii)):

Your unpaid principal balance is less than 80 percent of the home’s original value.
You are not currently delinquent or in default on the loan.

The official comments define “original value” as the lower of the sales price in the purchase contract, if any, or the appraised value at closing, and say the lender or servicer counts any second lien it has reason to know about. It may rely on your written statement that there is none (comment 35(b)(3)-3). These are minimums: the loan contract or other law may still let the lender require an escrow account after that (comment 35(b)(3)-2).

This example is only for the math, with example figures and dates, not values for any loan.

Item	Amount or date
Sales price in the contract	$300,000
Appraised value at closing	$310,000
Original value (the lower of the two)	$300,000
80 percent of $300,000	$240,000
Balance needed to ask for cancellation	less than $240,000
Closing date	June 15, 2027
A request counts if received no earlier than	June 15, 2032

The Escrow Closing Notice

When an escrow account set up with a first-lien closed-end loan will be cancelled, the lender or servicer must give you an “Escrow Closing Notice” saying when the account will close, why, any closing fee, and that you will then pay taxes and insurance yourself (12 CFR 1026.20(e), eCFR). You must receive it at least three business days before closure if you asked for the cancellation, or at least 30 business days before if you did not; a mailed notice counts as received three business days after mailing (1026.20(e)(5)).

Paying taxes and insurance yourself

The CFPB says an escrow account lets your servicer pay property taxes and insurance for you from part of each monthly payment (CFPB). Without one, those bills come to you directly. For ways to plan for a tax bill, see property tax bill payment options. For extra protections on loans with very high rates or fees, see high-cost home loan protections. For a problem with your escrow account, the CFPB suggests contacting your servicer right away (CFPB); you can also use consumerfinance.gov/complaint. For your own case, ask a lawyer; you can look for legal aid through the Legal Services Corporation.

Questions to ask the lender or servicer

Is my loan a higher-priced mortgage loan, and what APR and APOR did you compare?
Is the escrow account required by the federal rule, by my loan contract, or both?
If you say an exemption applies, which one?
What original value will you use, and what balance do I need to reach before I can ask to cancel?
Do you charge a fee to close the escrow account?

Checklist

Find out whether your first-lien loan is higher-priced (APR vs APOR).
Expect an escrow account for property taxes and required insurance, set up before closing.
You may ask to cancel no earlier than five years after closing, once you owe less than 80 percent of original value and are current.
Look for an Escrow Closing Notice before any cancellation.
Plan to pay taxes and insurance yourself once the account closes.

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Disclosure: Modern Lending Solutions is not a lender, loan broker or agent for any lender or loan broker, and does not make credit decisions. Any compensation we receive is paid by participating lenders, only for advertising services. This guide is general information, not financial or legal advice.

The Escrow Account Rule for Higher-Priced Mortgage Loans