A mortgage calculator that asks only for price, deposit, rate and term gives you principal and interest — and on a $450,000 home with 20 per cent down over 30 years at 6.75 per cent, that is $2,334.95 a month. The lender quotes $2,818.29, because property tax and insurance are collected alongside it. The gap is $483.34, or 20.7 per cent, and it is not a fee.
The industry calls the combined figure PITI: principal, interest, taxes and insurance. Understanding which of the four a given number includes settles almost every argument about why two mortgage quotes disagree.
What is actually in the monthly payment?
Four components, only two of which the loan controls.
| Component | On the example above | Set by |
|---|---|---|
| Principal and interest | $2,334.95 | The loan |
| Property tax | $350.00 | The local authority |
| Home insurance | $133.33 | The insurer |
| Total | $2,818.29 |
The tax and insurance figures come from $4,200 and $1,600 a year respectively, divided by twelve. Neither is charged by the lender; the lender collects them into an escrow account and pays the bills on your behalf when they fall due.
Why does the lender collect them at all?
Because unpaid property tax becomes a lien that ranks ahead of the mortgage, and an uninsured house that burns down is no longer collateral. Escrow protects the lender first and the borrower second, which is why it is usually mandatory rather than offered.
The practical effect is that your payment changes without the interest rate changing. A reassessment that raises the property tax by $600 a year adds $50 a month to a fixed-rate mortgage — and the lender is required to re-run the escrow analysis and adjust, sometimes with a lump-sum shortfall to make up.
What else appears that the calculator does not show?
Two more items, both conditional.
- Mortgage insurance. Below roughly 20 per cent equity, most lenders require it. It is charged monthly, it protects the lender rather than you, and it typically falls away once the balance drops far enough.
- Association dues. A condominium or a managed development charges monthly, and while the lender does not collect it, an underwriter counts it against your income.
The deposit size drives both the loan and the insurance. Putting 5 per cent down on the same $450,000 house leaves a $427,500 loan and a principal-and-interest payment of $2,772.76 — $437.81 a month more than the 20 per cent case, before any mortgage insurance is added on top.
Does the escrow money earn anything?
Usually not much, and in many places not at all. You are handing over a year of tax and insurance in twelve instalments in advance, plus a cushion the lender is permitted to hold, and the account rarely pays meaningful interest.
That is the real cost of escrow: not a fee, but the loss of use of a float. It is generally accepted as the price of the arrangement, and in most cases waiving escrow is either unavailable or attracts a rate adjustment that costs more than the float is worth.
How should you compare two quotes?
By separating the parts before comparing anything. Two lenders quoting $2,800 and $2,950 may be offering identical loans with different tax estimates, or genuinely different rates — and the monthly figure alone cannot tell you which.
- Compare the rate and the term first. They are the loan.
- Compare the annual percentage rate next, because it folds in the fees.
- Treat the tax and insurance lines as estimates from public data, identical whoever lends you the money.
- Check whether mortgage insurance is in the quoted figure, and at what point it stops.
The tax and insurance numbers are yours, not the lender’s. A quote that assumes $4,200 of property tax on a house that is actually assessed at $6,000 is not a better deal — it is a worse estimate, and the difference shows up as an escrow shortfall in the first year.
Questions people ask
Why did my payment go up on a fixed-rate loan? Almost always escrow. The rate is fixed; the tax bill and the insurance premium are not, and the payment absorbs both.
Can I pay the tax myself? Sometimes, above a certain equity level and often for a small rate adjustment. Whether it is worth it depends on what else you would do with the float.
Does a 15-year term help? It costs more monthly and far less overall. The same $360,000 at 6.75 per cent is $3,185.67 a month over 15 years against $2,334.95 over 30, and $213,421 of interest against $480,583 — a saving of $267,162 for $850.72 more each month.
Is the total interest figure real? It is arithmetic, and it assumes the loan runs its full term at the stated rate. Most mortgages are refinanced or repaid early, so the figure is an upper bound rather than a forecast.
What is an escrow shortfall? The gap that appears when the bills came in higher than the lender collected for. It is settled either as a lump sum or spread over the next twelve payments, on top of the increase itself — which is why a tax rise often lands twice.
Separate the loan from the bills it arrives with and the quotes become comparable. The mortgage calculator shows the escrow line explicitly, the loan calculator strips it back to the borrowing itself, and the paycheck calculator tells you what the income side of the affordability test looks like.