The breakdown or listing of the payment items on your monthly mortgage statement shows principal and interest charges for the loan, but also lists dollar amounts for escrow and MIP. The escrow and mortgage insurance premium amounts you pay represent additional costs to having a home mortgage that the mortgage company handles.
Mortgage Escrow Account
Your mortgage company collects and maintains funds in escrow for the payment of taxes and homeowners insurance on your home. The mortgage company considers these payments to be important to protect its interest in you home, so the escrow portion of your loan is established to make sure the payments are made. Property taxes and insurance payments are typically due once a year. Collecting escrow with your mortgage payment spreads out these costs over the 12 monthly home loan payments. The mortgage company holds the money until the tax and insurance payments must be paid.
If you have a Federal Housing Administration insured home loan, part of the cost of that type of loan is an annual mortgage insurance premium. Although it is calculated as an annual amount, the FHA requires that the MIP on you loan be collected and sent in on a monthly basis. Multiply the monthly MIP amount shown on your mortgage statement times 12 to calculate the annual FHA MIP total. The MIP charge is not optional if you choose to finance with a FHA insurance home loan.
Reducing the Charges
The mortgage company calculates the monthly escrow amount on your mortgage payment to make sure the company has enough money to pay taxes and insurance when they come due. You can't do much about property taxes, but you can get home insurance quotes every year before your policy comes due to make sure you are paying a competitive rate. You get to stop paying the FHA MIP when either your loan-to-balance ratio drops below 78 percent or you have had the loan for 11 years, depending on when you took out the loan and the FHA rules in effect at that time.
No Escrow Required
If you have less than 20 percent equity when you obtain a new home mortgage, the lender will require that an escrow account be established and that the mortgage company handle the tax and insurance payments. Once you have more than 20 percent equity it is possible to stop the escrow collections and take responsiblity for making the payments for property taxes and homeowners insurance. However, these payments must still be made, so stopping the escrow does not save you any money.
- HUD: Mortgagee Letter 2013-04
- Allie Mae: Escrow Explained
- Savvyhomebuying.com: Chapter Two - Get Pre-Approved for a Mortgage, page 6
- The Mortgage Reports: Mortgage Definition : Escrow Real Estate Taxes And Homeowners Insurance
- U.S. Department of Housing and Urban Development. "Federal Housing Administration." Accessed Mar. 9, 2020.
- Consumer Financial Protection Bureau (CFPB). "What Is Private Mortgage Insurance?" Accessed Mar. 9, 2020.
- Consumer Financial Protection Bureau (CFPB). "How Do Mortgage Lenders Calculate Monthly Payments?" Accessed Mar. 9, 2020.
- Consumer Financial Protection Bureau (CFPB). "How Does Paying Down a Mortgage Work?" Accessed Mar. 9, 2020.
- Consumer Financial Protection Bureau (CFPB). "Seven Factors That Determine Your Mortgage Interest Rate." Accessed Mar. 9, 2020.
- Rocket Mortgage. "Property Taxes: What They Are and How They’re Calculated." Accessed Mar. 9, 2020.
- Travelers. "What's the Difference Between Homeowners Insurance and Mortgage Insurance?" Accessed Mar. 9, 2020.
- Consumer Financial Protection Bureau (CFPB). "What Is a Prepayment Penalty?" Accessed Mar. 9, 2020.
- Internal Revenue Service (IRS). "Publication 936 (2019), Home Mortgage Interest Deduction." Accessed Mar. 9, 2020.
- Consumer Financial Protection Bureau (CFPB). "TILA-RESPA Integrated Disclosures." Accessed Mar. 9, 2020.
Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.