Your mortgage payment usually covers four separate costs, not just the loan itself
Your monthly mortgage payment typically includes four things: principal (the amount you borrowed), interest (the lender's charge for lending it), property tax, and homeowners insurance. Not all of these go to your lender. The principal and interest always do. The property tax and insurance usually do too — your lender collects them and pays the bills on your behalf — but the exact breakdown depends on your loan type and your lender's requirements.
This four-part payment is sometimes called PITI, which stands for Principal, Interest, Taxes, and Insurance. Understanding which piece is which matters because it affects how much you actually owe, what happens if one of those costs changes, and whether you might get money back at tax time.
Key Takeaways
- Principal and interest always go into your mortgage payment, but property tax and insurance may or may not depending on your loan type and whether your lender requires an escrow account.
- An escrow account is a separate account your lender holds where they collect money for taxes and insurance, then pay those bills when they are due.
- If your property tax or insurance cost changes, your monthly payment can go up or down even if your loan terms stay the same.
- Some loans, particularly cash-out refinances or investment property mortgages, do not require an escrow account, meaning you pay taxes and insurance separately.
When property tax and insurance are included in your payment
Most conventional mortgages — the kind most homebuyers get — require you to set up an escrow account. This is a separate account held by your lender where they collect a portion of your monthly payment specifically for property taxes and homeowners insurance. Your lender then uses that money to pay those bills when they come due.
Your lender does this because they have a financial stake in the property. If you stop paying property tax, the county can foreclose and take the house. If the house burns down and you have no insurance, the lender loses their collateral. So they require escrow to make sure those bills get paid, even if you forget.
When you have an escrow account, your monthly payment statement usually breaks down exactly how much is going to principal, how much to interest, how much to taxes, and how much to insurance. This makes it straightforward to see where your money goes.
When property tax and insurance are separate from your payment
Some mortgages do not require an escrow account. This is more common with jumbo loans (very large mortgages), investment property loans, or refinances where you are taking cash out. In these cases, you pay your property tax and homeowners insurance directly to the county and insurance company — they are not part of your monthly mortgage payment.
If you have this type of loan, you are responsible for remembering to pay these bills on time. Missing a property tax payment can result in penalties, interest charges, or even a tax lien on your home. Missing an insurance payment can leave you uninsured, which is risky and may violate the terms of your mortgage.
Some borrowers prefer this arrangement because they have more control over which insurance company they use or how much coverage they buy. Others find it easier to have everything bundled into one payment.
How changes in taxes or insurance affect your payment
If your property tax assessment goes up or your homeowners insurance premium increases, your monthly mortgage payment can rise even though the loan itself has not changed. This happens because your lender recalculates the escrow account each year based on the new tax and insurance costs.
Your lender is required to review your escrow account at least once a year. If they predict that the money you have been paying will not be enough to cover the bills coming due, they raise your monthly payment. If they predict you will have paid too much, they may lower your payment or send you a refund.
This is why your mortgage payment can change year to year even on a fixed-rate loan. The interest and principal portions stay the same, but the tax and insurance portions move up or down based on actual costs in your area.
Understanding your escrow statement
Once a year, your lender sends you an escrow statement that shows how much money came in, how much went out for taxes and insurance, and what balance remains. This statement is your chance to catch errors or understand why your payment changed.
The statement lists the estimated property tax bill, the estimated insurance premium, and the monthly amount your lender is collecting for each. If you know your actual tax bill or insurance cost is different from what the lender estimated, you can contact them to request an adjustment.
If your escrow account has a large surplus (more than two months of payments), some states require your lender to refund the excess. If it has a shortage (less than required), your lender may ask you to pay a lump sum or spread the shortage over the next 12 months.
What happens if you pay off your mortgage early
When you pay off your mortgage, your lender closes the escrow account. Any money left in it — the surplus — is returned to you, usually within 30 days. This can be a meaningful amount if your property taxes or insurance costs dropped during the year.
At the same time, you become solely responsible for paying property tax and homeowners insurance going forward. Make sure you know when these bills are due and set up a system to pay them on time, since no one will be collecting the money for you anymore.
Frequently Asked Questions
Can I choose not to have an escrow account if my lender requires one?
Most lenders will not allow you to waive escrow on a purchase mortgage or a standard refinance. Some lenders may allow it if you have significant equity in the home and a strong credit history, but this is uncommon. Investment property loans and jumbo mortgages are more likely to offer the option.
What if my property tax bill is much higher than the lender estimated?
Contact your lender and provide a copy of the actual tax bill. They will recalculate your escrow payment based on the real number. If the shortage is large, they may spread it over several months rather than raising your payment all at once.
Does my escrow account earn interest?
Escrow accounts typically do not earn interest. Your lender holds the money in a non-interest-bearing account. Some states have laws requiring interest on escrow accounts, so check your state's rules if this matters to you.
Can I pay my property tax and insurance myself instead of through escrow?
Only if your lender does not require escrow. If escrow is required and you try to pay these bills separately, you will be in violation of your loan agreement. Always confirm with your lender before changing how you pay taxes or insurance.
Why did my escrow payment go down this year?
Either your property tax assessment decreased, your homeowners insurance premium dropped, or both. Your lender recalculates escrow annually based on current costs. You can ask your lender for an itemized breakdown showing the new tax and insurance estimates.