What You'll Learn
- Your monthly escrow payment covers property taxes and homeowners insurance that your lender will pay on your behalf.
- Escrow payments are estimates so at the end of the year you may get a refund or have to pay extra for a shortfall.
- Once you’ve built up enough equity in your home, you can cancel your PMI.
In addition to principal and interest, your monthly mortgage payment may also include an escrow payment (property taxes and homeowners insurance) and private mortgage insurance (PMI) payment.
Escrow Payments
If your lender set up an escrow account for your mortgage, each month you’ll also make an escrow payment to cover your property taxes and homeowners insurance. Your lender will deposit this amount into your escrow account and will pay for both of these items on your behalf when they are due.
- Lenders will estimate your homeowners insurance premium and real-estate property taxes yearly. It’s important to remember that it’s an estimate so at the end of the year you may get a refund or have to pay extra for a shortfall.
- Your taxes and insurance premiums will change over time and your escrow payment estimate will be adjusted yearly to reflect any changes.
- Check your year-end escrow statement carefully to make sure your bills are being paid and there are no mistakes. If you have questions or find a problem, contact your lender immediately as these payments are ultimately your responsibility.
You may have the option to cancel your escrow payments to your lender once you have built up at least 20% equity in your home and are current on your payments. If you decide to go this route it is important to remember that you’ll now be responsible for paying your taxes and insurance in full and on time.
Tip
Regularly scheduled monthly escrow payments are a good option for many homeowners because they eliminate the surprise of large annual or semi-annual payments when property taxes or insurance premiums are due.
Private Mortgage Insurance
If you made a down payment of less than 20% to buy your home, private mortgage insurance or PMI will be part of your monthly mortgage payment.
- The cost of PMI varies based on your loan-to-value ratio – the amount you owe on your mortgage compared to its value – and credit score. You can expect to pay between $30 and $70 per month for every $100,000 borrowed.
- You'll have to pay PMI until you’ve built up more than 20% equity in your home. Borrowers with FHA loans are responsible for paying FHA mortgage insurance premiums for the life of the loan.
- If you are current on your mortgage payments, PMI will automatically terminate on the date when your principal balance is scheduled to reach 78% of the original value of your home. That date will be given to you in writing on a PMI disclosure form when you get your mortgage. Learn More
You can also request that your lender cancel your PMI if you have made additional payments or if rising home values have increased your home equity to more than 20%. Your request must be in writing and meet additional criteria that your lender specifies.
