Mortgage Escrow Explained: Property Tax and Insurance in Your Monthly Payment
When you own a home with a mortgage, your monthly payment is often more than principal and interest. Lenders bundle property taxes and homeowners insurance into an escrow account — collecting one-twelfth of each bill every month and paying them when they come due. Here is what escrow is, what goes into it, and why it exists.
What is an escrow account?
An escrow account is money your lender holds on your behalf. Each month you pay into it, and a couple of times a year the lender pays your property tax bill and insurance premium out of it. You never handle the bills — that is the point: escrow turns two large annual expenses into one predictable monthly amount.
What is inside the monthly escrow payment?
- Property taxes — your county’s annual tax divided by 12
- Homeowners insurance — your annual premium divided by 12
- PMI or MIP, if any — sometimes collected through escrow too
On a $400,000 home with a 1.1% tax rate and $1,800 of insurance, that is $4,400 + $1,800 = $6,200 a year — about $517 per month on top of principal and interest. The escrow calculator shows your number.
Why lenders require it
A lender’s biggest risk is a borrower who stops paying: property taxes are a lien that outranks the mortgage, and an uninsured home can lose its value overnight. Escrow protects the lender’s collateral — which is why it is usually required when you put down less than 20%.
Can you opt out?
Often yes. With 20% or more down, many lenders let you manage the bills yourself and skip escrow entirely. You pay the tax and insurance directly and never deal with an escrow shortage — the trade-off is budgeting for the big annual bills yourself.
The annual escrow analysis
Once a year the lender recalculates: if your tax or insurance went up, your monthly payment rises to cover the shortage; if you overpaid, you get a refund check. This is why the escrow line can change every year even when your rate is fixed. Most lenders also keep a cushion of about two months’ worth of payments, so the amount is rarely exact.
The full picture: PITI
Add escrow to principal and interest and you get PITI — the real monthly cost of owning. The mortgage payment calculator puts it all together, the property tax calculator sizes the tax line, and the how much house can I afford calculator makes sure escrow fits your budget before you make an offer.
Run the numbers
Estimate your monthly escrow with the escrow calculator, then see the complete payment with the mortgage payment calculator. Buying soon? Check the closing costs calculator — the first year’s taxes and insurance (plus the lender’s cushion) are paid at closing, which is why closing costs run higher than expected.