Mortgage Payments Beyond Principal and Interest

When most first-time buyers think about a mortgage, they often focus on two main parts: principal and interest. But when you receive your monthly mortgage bill, you may notice that the amount is higher than expected. That’s because your mortgage payments often include more than just the cost of borrowing money. There’s a third key component working behind the scenes: the escrow account.

Understanding how escrow works and how it helps manage your property taxes and homeowners’ insurance is essential to becoming a confident and informed homeowner.

What Are Mortgage Payments Really Made Of?

A typical mortgage payment has four parts, often abbreviated as PITI:

Principal – The portion that goes toward reducing the original loan amount
Interest – The cost you pay to borrow money from the lender
Taxes – Your local property taxes
Insurance – Your homeowners’ insurance policy

The taxes and insurance portions are usually paid through your escrow account, which your lender manages on your behalf.

What Is an Escrow Account?

An escrow account is a special account set up by your mortgage lender to collect and hold money for:

Property taxes
Homeowners insurance premiums
(Sometimes) Flood insurance or mortgage insurance

Rather than paying these large expenses once or twice a year on your own, your lender spreads them out into manageable monthly chunks. Each month, part of your mortgage payment is deposited into your escrow account. When those bills come due, your lender pays them on your behalf using the escrow funds.

Why Escrow Accounts Exist

The escrow system is designed to protect both the homeowner and the lender.

For You (the Homeowner):

Prevents surprise tax bills or insurance lapses
Makes budgeting easier with consistent monthly payments
Keeps you in compliance with your local tax authority and insurance provider

For the Lender:

Ensures that the home (their collateral) is always properly insured and not at risk due to unpaid taxes

How Your Escrow Payments Are Calculated

Let’s say your annual property taxes are $3,600 and your homeowners insurance costs $1,200 per year. That’s a total of $4,800 per year, or $400 per month.

That $400 will be added to your monthly mortgage bill, on top of your principal and interest payments.

🧮 Example Monthly Breakdown:

Component	Monthly Amount
Principal & Interest	$1,400
Property Taxes	$300
Insurance	$100
Total Mortgage Payment	$1,800

The taxes and insurance are held in your escrow account, and your lender will use those funds to pay the bills when due.

What Causes Escrow Changes Over Time?

Your escrow payment isn’t fixed forever. It can change annually based on:

Increases in property taxes (often due to reassessment or rising tax rates)
Changes in insurance premiums
Shortages or surpluses in the escrow account from the previous year

Your lender performs an annual escrow analysis to review past and projected costs. If taxes or insurance go up, your escrow contribution will too, possibly increasing your monthly mortgage payment.

If your escrow account had a shortage, your lender may:

Increase your monthly payment to make up the difference
Or offer a one-time payment option to cover the shortage

Can You Waive an Escrow Account?

In some cases, yes, but it depends on your loan type and lender.

Generally, lenders allow you to waive escrow only if:

You have a conventional loan
You’re putting down 20% or more
You demonstrate a strong financial profile

However, waiving escrow means you’re responsible for paying large annual taxes and insurance bills on your own. For most first-time buyers, keeping escrow is the safer and simpler choice.

Tips for Managing Escrow Like a Pro

Open and read your annual escrow statement: It explains any changes and provides a detailed breakdown of upcoming expenses.
Budget for increases: Property taxes and insurance rarely go down.
Review your insurance annually: Shop around if premiums spike.
Set up a personal “escrow buffer”: If you’re concerned about changes, keep a little savings cushion in your own bank account just in case.

Understanding Mortgage Payments = Confident Homeownership

Knowing what goes into your mortgage payments, beyond principal and interest, is key to avoiding surprises and managing your finances wisely.

An escrow account is your silent partner, working in the background to make sure your taxes and insurance are always covered. While it may seem like an extra layer of complexity, it simplifies homeownership for most first-time buyers.

Want Help Understanding Your Mortgage Options?

At Premiere Mortgage, we guide first-time buyers through every step of the process—from pre-approval to final payment. We’ll explain your full monthly mortgage payment, set up your escrow account properly, and make sure you’re never caught off guard by hidden costs.

👉 Reach out to Premiere Mortgage today to get started on your path to stress-free homeownership.