What Is Escrow?
Understanding escrow and your monthly mortgage payment
Many first-time homebuyers are surprised to learn that their monthly mortgage payment is higher than the amount needed to repay their loan balance. That's because mortgage payments often include more than just principal and interest.
In many cases, lenders require borrowers to contribute to an escrow account as part of their monthly payment.
An escrow account helps you set aside funds throughout the year to cover expenses related to homeownership, making it easier to manage large bills when they come due.
Get Preapproved View Rates
Think of escrow as a built-in budgeting tool for homeownership.
An escrow account is used to collect and hold money that will be used to pay certain property-related expenses, including:
- Property taxes
- Homeowners insurance
- Private Mortgage Insurance (PMI), when applicable
Rather than paying these expenses in large lump sums throughout the year, you contribute a portion each month as part of your mortgage payment.
When taxes or insurance premiums come due, the funds are paid directly from your escrow account on your behalf.
For many homeowners, escrow offers convenience and peace of mind.
Easier Budgeting
Instead of paying large annual or semi-annual bills all at once, escrow allows you to spread those costs across monthly payments.
Automatic Payments
When property tax and insurance bills are due, payments are made directly from your escrow account, helping you avoid missed due dates.
Continued Insurance Coverage
Escrow helps ensure homeowners insurance premiums are paid on time, reducing the risk of a lapse in coverage.
Reduced Risk for Lenders
Lenders benefit as well because the property remains insured and property taxes remain current, helping protect the investment for everyone involved.
When you close on your mortgage, your lender estimates the annual cost of eligible expenses, including property taxes, homeowners insurance, and PMI if required.
The total annual amount is divided by 12 months to determine your monthly escrow contribution.
Property taxes and insurance costs can change over time. Because of this, your escrow payment may occasionally increase or decrease.
Your lender performs an annual escrow analysis to compare the amount collected with the actual expenses paid from the account. If taxes or insurance premiums change, your monthly escrow contribution may be adjusted accordingly.
Whether you’re buying your first home, refinancing an existing mortgage or simply trying to better understand your monthly payment, our mortgage experts are here to guide you.
Mortgage Calculators
Try out one of our handy calculators and crunch some serious numbers to see how much home you can afford.
Learn More
Learn more about the mortgage application process and find the documents you'll need to get started, whether you’re buying your home in Michigan or anywhere else in the U.S. These resources are especially helpful for first-time home buyers or anyone who has never had a home loan before.
All loans subject to approval. Rates, terms, and conditions are subject to change and may vary based on credit worthiness, qualifications, and collateral conditions.
