Definition
An escrow account is held by your mortgage servicer to collect and pay property taxes and homeowners insurance on your behalf. A portion of every monthly mortgage payment goes into escrow so the funds are ready when those large annual bills come due.
Example
If your annual property tax is $4,200 and homeowners insurance is $1,500, your lender collects $475 per month in escrow ($5,700 ÷ 12). Your total monthly payment covers principal, interest, and this escrow amount — together called PITI.
How It's Calculated
Your lender divides your total annual escrow costs by 12 to arrive at your monthly escrow payment:
Monthly Escrow = (Annual Property Tax + Annual Insurance) ÷ 12
Lenders also typically maintain a small cushion (up to two months' worth) to cover unexpected increases. Your escrow balance is reviewed annually and adjusted if your tax or insurance costs change.
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