Housing & property
Mortgage escrow: Definition, Formula and Example
A mortgage escrow account holds collected funds so a servicer can pay specified property expenses, commonly taxes and insurance, on the borrower’s behalf.
Scope: U.S. mortgage servicing context; actual collection rules and loan terms control.
Other names and related labels: Impound account; Tax and insurance escrow.
How it works
The monthly collection is part of the total housing payment but is not mortgage principal or interest. Tax bills, premiums, shortages and permitted account cushions can change the collection even on a fixed-rate mortgage. Closing escrow for a transaction is a different use of the word.
Simple monthly provision = annual included property expenses / 12
An actual escrow analysis may also include timing, a permitted cushion and shortage repayment. Homeowners remain responsible for property expenses without escrow.
$4,800 of annual tax and insurance
Assume $3,600 property tax and $1,200 homeowners insurance.
- Annual total: $3,600 + $1,200 = $4,800.
- Simple monthly provision: $4,800/12 = $400.
- With $1,200 of principal and interest, the illustrated total is $1,600 monthly.
Escrow adds $400 to the illustrated monthly housing payment.
No cushion, shortage, mortgage insurance or HOA dues included; actual collections can differ.
The worked example uses the assumptions above. Related tools may model a different scope; check their descriptions before comparing results.
A fixed interest rate does not fix the total mortgage bill
Principal and interest may stay constant while taxes and insurance rise. Escrow also does not eliminate those ownership costs or make them part of the amount reducing the loan.
Explore with a calculator
- Mortgage Calculator
Separate principal and interest from entered ownership costs.
- Rent Calculator
Explore a housing budget with recurring non-loan costs.
Sources and checks
Definition and example arithmetic checked . Sources explain the concepts; numerical examples use the assumptions stated above.
Calculation methodology and review status · All glossary terms