If you have a mortgage, you've been paying homeowners insurance through escrow. Here's exactly how that system works — and the critical things homeowners get wrong.
How Escrow Works
Your monthly mortgage payment is actually four things bundled together (sometimes called PITI):
- P — Principal: Pays down your loan balance
- I — Interest: The cost of borrowing money
- T — Taxes: Property taxes held in escrow until due
- I — Insurance: Homeowners insurance premium held in escrow until due
Your lender collects a portion of your annual insurance premium each month, holds it in an escrow account, and pays your insurer directly when the premium is due.
The Annual Escrow Analysis
Once a year, your lender reviews your escrow account and adjusts your monthly payment based on:
- What your homeowners insurance actually costs (which changes at renewal)
- What your property taxes actually cost (which change based on assessments)
- Whether there's a shortage or surplus in your escrow balance
If your insurance premium went up — which it has for most homeowners since 2022 — your lender will increase your monthly payment to cover the difference.
What Loan Officers Should Tell Their Clients
The best thing you can do for a new homebuyer is set expectations upfront: their monthly payment will likely increase in year 2 and beyond as insurance and tax costs are finalized and adjusted. A surprise $200/month increase at first escrow analysis is one of the most common causes of post-closing frustration.