📋 What You'll Learn
What Is Escrow?
Escrow is a holding account managed by your mortgage servicer. Each month, part of your mortgage payment goes into this account. When your property taxes and homeowners insurance come due, your servicer pays them from the escrow account.
Why Lenders Require Escrow:
- Protects their investment — Unpaid taxes can result in tax liens that take priority over the mortgage
- Ensures insurance coverage — If your house burns down uninsured, the lender loses their collateral
- Spreads costs over 12 months — Easier for you than paying large lump sums
What Goes Into Escrow:
🏛️ Property Taxes
Paid annually or semi-annually to your county. Rates vary from 0.28% (Hawaii) to 2.49% (New Jersey) of home value.
🏠 Homeowners Insurance
Protects against fire, theft, liability, etc. Average cost: $1,500-$3,000/year depending on location and coverage.
🔒 PMI (If Applicable)
Private Mortgage Insurance required if down payment is less than 20%. Costs 0.5-1.5% of loan amount annually.
🌊 Flood Insurance (If Required)
Required in flood zones. Average cost: $700-$2,000/year. Can be much higher in high-risk areas.
💡 Can You Avoid Escrow?
Some lenders allow you to waive escrow if you put 20%+ down. You'd pay taxes and insurance yourself. This gives you more control but requires discipline to save for these large bills. Some lenders charge a fee (0.25% higher rate) to waive escrow.
How to Calculate Your Real Monthly Payment
Here's the formula for your complete monthly payment:
Principal & Interest + Property Taxes + Insurance + PMI = Total Payment
Step-by-Step Calculation:
Example: $400,000 Home, 10% Down, 6.5% Rate
Use mortgage calculator or formula
$400,000 × 1.1% ÷ 12
$2,000/year ÷ 12
$360,000 × 0.8% ÷ 12
🚨 The $774/Month Surprise
In this example, escrow adds $774/month to your payment. That's $9,288/year that basic calculators don't show you. This is why so many first-time buyers are shocked when they see their actual mortgage statement.
Property Taxes by State (2025)
Property tax rates vary dramatically by state. Here are the extremes and some major states:
| State | Effective Rate | Annual Tax on $400K Home | Monthly Escrow |
|---|---|---|---|
| New Jersey | 2.49% | $9,960 | $830 |
| Illinois | 2.27% | $9,080 | $757 |
| Texas | 1.80% | $7,200 | $600 |
| California | 0.76% | $3,040 | $253 |
| Florida | 0.89% | $3,560 | $297 |
| Colorado | 0.51% | $2,040 | $170 |
| Hawaii | 0.28% | $1,120 | $93 |
💡 Pro Tip: Check Your Specific County
Property tax rates vary by county, city, and even school district. The same house can have very different taxes depending on which side of a street it's on. Always check the actual tax bill for a specific property, not just state averages.
Homeowners Insurance Costs
Homeowners insurance protects your home and belongings against damage, theft, and liability. Costs vary based on location, home value, coverage amount, and risk factors.
Average Annual Premiums by State (2025):
Highest Cost States
- Oklahoma: $4,500+
- Kansas: $4,200+
- Nebraska: $4,000+
- Texas: $3,800+
- Florida: $3,500+
Average Cost States
- National Average: $2,000
- New York: $2,100
- California: $1,800
- Arizona: $1,900
- Georgia: $2,200
Lowest Cost States
- Hawaii: $500
- Vermont: $900
- Utah: $1,000
- Oregon: $1,100
- Idaho: $1,200
Factors That Affect Your Premium:
- Location — Coastal, tornado alley, wildfire zones cost more
- Home value and size — More to replace = higher premium
- Age of home — Older homes often cost more to insure
- Roof condition — New roof can save 10-20%
- Claims history — Previous claims raise your rate
- Deductible — Higher deductible = lower premium
- Credit score — Better credit = lower rates (in most states)
PMI: When You Pay & How Much
Private Mortgage Insurance (PMI) is required when your down payment is less than 20%. It protects the lender (not you) if you default.
PMI Cost Ranges:
| Down Payment | Typical PMI Rate | Monthly Cost ($350K loan) |
|---|---|---|
| 3-5% | 0.8-1.5% | $233-$438 |
| 5-10% | 0.5-1.0% | $146-$292 |
| 10-15% | 0.3-0.7% | $88-$204 |
| 15-19.99% | 0.2-0.5% | $58-$146 |
| 20%+ | No PMI | $0 |
How to Remove PMI:
- Automatic removal at 78% LTV — Lender must remove when you reach 78% loan-to-value based on original value
- Request removal at 80% LTV — You can request removal when you reach 80% (may require appraisal)
- Refinance — If home value increased, refinance to remove PMI
- Reappraisal — If home value increased significantly, request new appraisal
Escrow Shortages: Why Your Payment Can Increase
Even with a fixed-rate mortgage, your payment can change due to escrow adjustments. Here's why:
Common Causes of Escrow Shortages:
🏛️ Property Tax Increases
If your county raises tax rates or reassesses your home at a higher value, your taxes go up. Your escrow payment must increase to cover the difference.
🏠 Insurance Premium Increases
Insurance costs have risen dramatically (20-40% in some states) due to climate-related claims. Your escrow must adjust to cover higher premiums.
📉 Initial Underestimate
Sometimes lenders underestimate taxes or insurance when setting up your loan. The first escrow analysis reveals the shortage.
What Happens When There's a Shortage:
- Annual escrow analysis — Your servicer reviews the account yearly
- Shortage identified — They calculate how much is needed
- You get options:
- Pay the shortage in a lump sum
- Spread it over 12 months (higher monthly payment)
- Payment adjusts — Your new monthly payment reflects the change
💡 Pro Tip: Budget for Increases
Plan for your escrow payment to increase 2-5% annually. Property taxes and insurance rarely go down. Setting aside an extra $50-$100/month can prevent budget shock when the escrow analysis arrives.
🏠 Ready to See Your Real Payment?
Get pre-approved and see exactly what your monthly payment will be—including escrow, taxes, insurance, and PMI. Compare offers from multiple lenders.
Get Pre-Approved & See Your Real Payment →❓ Frequently Asked Questions
What is included in escrow on a mortgage?
Escrow typically includes property taxes and homeowners insurance. It may also include PMI (if applicable), flood insurance (if required), and HOA dues (in some cases).
Why did my mortgage payment go up if I have a fixed rate?
Your principal and interest stay fixed, but your escrow can change. Property tax increases, insurance premium hikes, or escrow shortages can all raise your total monthly payment.
Can I pay my own taxes and insurance instead of escrow?
Some lenders allow escrow waivers if you put 20%+ down. You'd pay taxes and insurance directly. This requires discipline to save for large annual bills. Some lenders charge a fee (higher rate) for this option.
How much should I budget for escrow?
A good rule of thumb: budget 25-35% on top of your principal and interest payment for escrow. For a $2,000 P&I payment, expect $2,500-$2,700 total. This varies significantly by location.
What happens to escrow when I sell my house?
Any money remaining in your escrow account is refunded to you after the sale closes. This typically takes 2-4 weeks and comes as a separate check from your mortgage servicer.