An escrow cushion (or reserve) is made up of funds that a servicer requires a homeowner to pay into an escrow account to cover unanticipated disbursements or disbursements made before the homeowner's payments are available in the account. In practice, this cushion ensures that there's enough money in the account to cover possible increases in taxes or insurance. You can think of it as a buffer equal to about two months of escrow payments.
Property taxes and homeowners insurance rates can change during the life of a mortgage loan, and certain events can further impact your escrow payments. For example, the value of your home may increase, pushing up your property tax bill. Or, your insurance bill may increase if you remodel and add an extra bedroom to your home.
Because of this, federal law allows your servicer to collect an extra two months’ worth of escrow payments throughout the year. If we estimate that your property taxes and homeowners insurance payments come out to $6,000 a year ($500 a month), we'll collect an additional $1,000 a year—or, two months of payments—for a total of $7,000. So, instead of paying $500 a month for escrow, you'd pay approximately $583 a month ($7000 divided by 12 months).