When you pay your mortgage each month, you’re paying more than just your mortgage loan.
You’re paying your taxes and homeowners insurance, too; the inclusion of which is known by the industry term escrow. As in the “escrow” of your taxes and insurance.
When you escrow your taxes and insurance, your mortgage statement each month includes a one-month portion of both your annual real estate tax bill and yearly homeowners insurance premium, which your lender lumps into a single payment known as your PITI. Principal, interest, taxes, and insurance.
The principal and interest is the amount you pay your lender. Meanwhile, your taxes and insurance get held in a separate account and disbursed when your tax and insurance bills come due.
Lenders like when people escrow because it’s risk prevention. Your home’s tax bill gets paid on-time without issue which helps avoid foreclosure, and your home’s insurance policy remains in effect which protects against loss.
Homeowners who choose to escrow often get breaks against their mortgage so be sure to check with your lender.
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