Your monthly mortgage payment is more than principal and interest. The escrow account collects property taxes and insurance on your behalf — here is exactly how it works.
Your monthly mortgage payment is more than principal and interest. The escrow account collects property taxes and insurance on your behalf — here is exactly how it works.
A mortgage escrow account is a third-party account managed by your loan servicer that collects and holds funds for property taxes and homeowner's insurance (and sometimes HOA fees, flood insurance, and PMI). Each month, a portion of your mortgage payment goes into this escrow account. When your property taxes or insurance premiums are due, the servicer pays them from the escrow account on your behalf.
Your complete monthly mortgage payment = PITI:
Example PITI on a $350,000 home (6.82%, 30 yr, $4,200/yr taxes, $1,800/yr insurance):
P&I: $2,297 + Taxes: $350 + Insurance: $150 = Total PITI: $2,797/month
Your servicer performs an annual escrow analysis to recalculate the required escrow amount for the coming year. If taxes or insurance increased, your payment adjusts. Common result: an escrow shortage (you owe a lump sum) or escrow surplus (you get a check). You'll receive an escrow analysis statement each year.
Some lenders allow you to waive escrow (pay taxes and insurance yourself) if you have 20%+ equity and strong credit. The lender may charge a waiver fee (0.25% of loan balance at origination). Benefits of self-managing: no float on your money in escrow, direct control over payments. Risks: requires discipline to save for large annual bills.