The formula
Escrow is the part of your monthly mortgage payment that the lender holds to pay two bills for you: the property tax and the homeowners insurance. If you pay private mortgage insurance, PMI, that is a third bill in the same pot. The formula is one addition and one division. Add the three yearly bills together to get the annual escrow, then divide by 12 to get the monthly escrow. That monthly number is added to the principal and interest on your mortgage statement. It is not the loan itself: principal and interest pay the loan, escrow pays the tax and insurance bills. This guide works the calculation in seven steps, then checks it against three worked examples.
Step 1 — Find your annual property tax
Look at your most recent property tax bill, or your county tax assessor’s website. The number you need is the full year’s tax, not a half-year instalment. On the worked example the tax is $4,800.00 a year. If you have just bought the house and the tax has not been billed yet, use the seller’s last bill or the assessor’s estimate, and expect the lender to adjust the escrow at the first annual analysis.
Step 2 — Find your annual homeowners insurance
Look at your homeowners insurance declarations page. The number you need is the annual premium, the full year’s price. On the worked example the premium is $1,800.00 a year. If your premium is paid monthly, multiply the monthly premium by 12 first — the escrow formula needs the yearly figure.
Step 3 — Add any PMI
If your down payment was under 20%, your lender probably charges private mortgage insurance. Find the annual PMI on the loan estimate or the first mortgage statement. On the worked example there is no PMI, so this step is $0.00. If you do pay PMI, add the full year’s PMI to the pot — $1,200.00 of PMI a year is $100.00 a month of escrow.
Step 4 — Add the three together
Add the tax, the insurance and the PMI. That is the annual escrow — the total the lender has to pay out over the year. On the worked example it is $4,800.00 + $1,800.00 + $0.00 = $6,600.00 a year. Check the addition: if the annual total looks wrong, one of the three bills is usually the culprit, and it is almost always the tax.
Step 5 — Divide by 12
Divide the annual escrow by 12. That is the monthly escrow — the amount added to your mortgage payment each month. On the worked example it is $6,600.00 ÷ 12 = $550.00 a month. The lender collects it monthly so the money is there when the tax and insurance bills come due.
Step 6 — Split the monthly escrow into its shares
Divide each yearly bill by 12 on its own. The tax share is $4,800.00 ÷ 12 = $400.00 a month, the insurance share is $1,800.00 ÷ 12 = $150.00 a month, and the PMI share is $0.00. The shares add back to the monthly escrow: $400.00 + $150.00 + $0.00 = $550.00. Knowing the shares is what makes the number useful — when the statement goes up, the shares show which bill moved.
Step 7 — Check the result against the yearly total
Multiply the monthly escrow by 12 and compare it with the annual escrow. On the worked example $550.00 × 12 = $6,600.00, which matches the annual total, so the calculation checks out. Two branches land on repeating decimals — 1900 ÷ 12 is 158.3333… and rounds to $158.33, and 6601 ÷ 12 is 550.0833… and rounds to $550.08 — so the shares can add to a cent more or less than the monthly escrow. That is rounding, not an error.
Three worked examples
The headline example: $4,800.00 of tax and $1,800.00 of insurance, no PMI. The annual escrow is $4,800.00 + $1,800.00 + $0.00 = $6,600.00, the monthly escrow is $6,600.00 ÷ 12 = $550.00, the tax share is $400.00 a month and the insurance share is $150.00 a month. A tax of $6,000.00 instead: the annual escrow is $6,000.00 + $1,800.00 + $0.00 = $7,800.00, the monthly escrow is $650.00, and the tax share is $500.00 a month. Insurance of $2,400.00 instead: the annual escrow is $4,800.00 + $2,400.00 + $0.00 = $7,200.00, the monthly escrow is $600.00, and the insurance share is $200.00 a month. Use the escrow calculator to run your own numbers.
The shortage rule
Once a year the lender does an escrow analysis and adjusts the monthly amount if the tax or the premium rose. A shortage is usually spread over the next 12 months. On the worked example, if the tax rises from $4,800 to $5,400 next year, the new annual escrow is $5,400.00 + $1,800.00 + $0.00 = $7,200.00, the new monthly escrow is $600.00, and the increase is $50.00 a month and $600.00 a year. Federal rules (RESPA) let the lender keep a cushion of up to two months of escrow payments on top of the expected bills, so the number on the statement can be a little higher than the bills divided by 12.
Two reverses to check your answer
Two numbers are worth knowing. The smallest whole-dollar annual tax for the monthly escrow to reach $600.00 is $5,400 — at $5,400 the monthly escrow is $600.00, and at $5,399 it is $599.92, just below $600. The smallest whole-dollar annual PMI for the monthly escrow to reach $600.00 is $600 — at $600 of PMI the monthly escrow is $600.00, and at $599 it is $599.92. If your own figures land near one of these, you have the right order of magnitude.
What the number does not tell you
The escrow formula tells you what the lender collects, not what the house costs. It does not include principal and interest, which pay the loan, and it does not include the lender’s cushion of up to two months of escrow payments. It cannot predict the next tax bill or the next premium — both can rise in the same year — and it assumes the three bills stay fixed for the year, which they rarely do. Use the monthly escrow to budget and to check the statement; use the lender’s annual escrow analysis for the number that actually lands on the bill.