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Financing · Regulation Z, 12 CFR 1026.35(b)Required escrow on a higher-priced mortgage loan: taxes, insurance and the 5-year rule

When the buyer's first mortgage on a principal dwelling is a higher-priced mortgage loan – an APR at least 1.5 percentage points above the average prime offer rate (2.5 for jumbo loans) when the rate is set – the lender may not make it unless an escrow account is established before closing for property taxes and the mortgage-related insurance the lender requires, such as hazard or mortgage insurance (12 CFR 1026.35(b)(1)). Exemptions include co-op share loans, initial construction loans, bridge loans of 12 months or less and reverse mortgages; condo, PUD and similar owners need not escrow insurance when the association keeps a master policy, and some small creditors in rural or underserved areas are exempt (§1026.35(b)(2)). The escrow can be cancelled only when the loan ends or on the borrower's request received at least five years after closing – and only if the balance is below 80% of the original value and the borrower is not delinquent or in default (§1026.35(b)(3)).

The rule (§1026.35(b))

  1. Which loans

    Higher-priced first-lien loans on the consumer's principal dwelling.

  2. What goes in escrow

    Property taxes and mortgage-related insurance the lender requires – hazard, liability, mortgage insurance.

  3. When

    Established before consummation.

  4. Cancel

    At payoff, or on request at least 5 years after closing – balance under 80% of original value and not delinquent.

No escrow needed for

  • Loans secured by co-op shares.
  • Loans financing the initial construction of a home.
  • Bridge loans of 12 months or less.
  • Reverse mortgages and PACE transactions.
  • Insurance (not taxes) when a condo, PUD or similar association keeps a master policy covering the homes.
  • Some small creditors lending in rural or underserved areas, under §1026.35(b)(2)(iii).

What it means for the closing

  • The Closing Disclosure will show an initial escrow deposit – more cash to close than a buyer who planned to pay taxes directly expected.
  • The insurance binder and tax figures must be ready in time for the lender to set the escrow.
  • A buyer who wants to drop escrow later must wait at least five years.

Questions buyers ask

Is an escrow account required on a higher-priced mortgage?

Yes for a first-lien higher-priced loan on a principal dwelling: an escrow for property taxes and required insurance must be set up before closing (12 CFR 1026.35(b)(1)), with listed exemptions.

When can I cancel a required escrow account?

At payoff, or on a request received at least five years after closing if the balance is below 80% of the original value and you are not delinquent or in default (§1026.35(b)(3)).

What makes a mortgage higher-priced?

An APR at least 1.5 percentage points above the average prime offer rate for a comparable loan on a first lien (2.5 for jumbo; 3.5 for a subordinate lien), when the rate is set (§1026.35(a)(1)).

Related guides

ClosingCode lists the homeowner's insurance binder as a standard document on buyer deals and requests it by link – one fewer thing holding up the escrow set-up.

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Source: 12 CFR 1026.35(a)(1) and (b) (Regulation Z), eCFR, read October 25, 2026.

General information, not legal or financial advice. Whether a loan is higher-priced depends on its APR when the rate is set; the lender decides. ClosingCode is software; it is not a lender. This guide is not a substitute for the advice or services of an attorney.