How to Compare Principal and Escrow Before Closing a Conventional Loan

The Quick Read: Principal and interest repay your loan and are fixed by its terms. Escrow is a separate pool of your own money that the servicer holds to pay property taxes and homeowners insurance, and it can change after closing. Before you sign, check each piece on its own line, because a payment that looks right in total can hide an escrow estimate that is too low or an item you will pay out of pocket.

Principal and Escrow in Plain Terms

Principal and escrow do different jobs. Principal pays down what you owe. Escrow never touches your loan balance. It sits in an account until a tax bill or insurance premium comes due, and then the servicer pays that bill for you.

Interest belongs with principal. Together they make up the “P&I” line, which is set by the loan terms. On a fixed-rate loan, that line does not move.

Mortgage insurance, when your loan carries it, is a third piece of the payment. Across the wholesale programs Lendmire places files with, a conventional loan needs mortgage insurance above 80% loan-to-value. You can ask to cancel it at 80% of the original value, and the servicer must end it automatically at 78%, under the Homeowners Protection Act. That is a rule of the loan, not an escrow choice. While it is monthly and borrower-paid, though, it is collected through escrow.

Where Each Piece Appears on Your Paperwork

The Loan Estimate and Closing Disclosure both split the payment into the same parts. The Projected Payments table lists principal and interest, mortgage insurance, and estimated escrow as separate lines. It also marks whether taxes and insurance are “In escrow?”

Items you do not escrow still appear under “Estimated Taxes, Insurance & Assessments.” The CFPB’s Loan Estimate explainer tells borrowers to confirm the total monthly payment matches their expectations and to look for items that are not escrowed. You pay those directly, which can mean one or two large bills a year.

Here is the lookup version.

The CFPB’s sample Closing Disclosure marks the estimated escrow line “Amount can increase over time.” So even with a fixed-rate loan, the total payment is not guaranteed to stay put. Only P&I is fixed.

How the Escrow Figure Is Built

Escrow is an estimate. It starts with the annual property tax and the annual homeowners insurance premium. The servicer divides those by twelve and collects that amount monthly.

At closing, you also fund an opening deposit. Under federal rules, the lender may collect only enough to keep the account from going negative, plus a cushion of up to two months of estimated disbursements. The CFPB’s page on escrow limits also says the servicer may collect up to one-twelfth of the annual bills each month. And it says most escrowed loans come with an initial statement and an annual statement showing history and a projection.

The opening deposit depends on when your first tax and insurance bills fall due. That is why cash to close can move even when nothing else changes. Don’t confuse it with prepaid items such as the first year of insurance; the Closing Disclosure lists them separately.

Taxes are the soft spot on a purchase. Your tax bill may be reassessed after you buy, so the estimate on your disclosure is a judgment call rather than a promise. Ask the loan officer how the tax figure was set, and compare it with the current bill and the county’s own information.

A Step-by-Step Way to Compare Before You Sign

This is the method most closing-table reviews skip. Run it when the Closing Disclosure arrives.

1. Put the Loan Estimate and Closing Disclosure side by side. The Closing Disclosure states final terms. Check that P&I, mortgage insurance and estimated escrow match, or that you understand every change.

2. Check P&I against the loan terms. It should reflect the loan amount, term and fixed or adjustable structure you chose.

3. Check estimated escrow against real bills. Compare the tax figure with the current tax bill and the insurance figure with your policy quote. If either looks low, ask why.

4. Read the “In escrow?” column. Confirm which items are escrowed. Any item left out becomes your own bill to pay.

5. Find the initial escrow deposit. Look at Section G on page 2 and the cushion on page 4. Make sure the cash to close accounts for it.

6. Look at the whole payment, not P&I alone. Two offers can show the same P&I while one leaves out escrowed items. Compare totals, not single lines.

7. Ask what happens at the first escrow analysis. Rising taxes or premiums can change your payment even on a fixed-rate loan.

Run this before closing day, while you still have room to ask questions. If a number is wrong, say so right away rather than signing and hoping.

Red Flags and What to Ask Your Loan Officer

Which Matters More: Principal or Escrow?

Neither, because you pay both. The two are required parts of one payment. The “which first” question only applies to extra money, after the required payment is made.

Extra money sent to principal lowers the balance and the interest you pay over time. Extra money sent to escrow does not lower the balance; it just builds a cushion. If you plan to prepay, Lendmire’s piece How to Send Extra Payments to Principal on a Conventional Loan With Escrow covers how to direct it.

That said, extra principal is not always the first move. Many borrowers do better paying down high-cost debt or building cash reserves first.

Can You Skip Escrow Altogether?

Sometimes, but the lender decides. Neither Fannie Mae nor Freddie Mac forces every borrower into escrow, and each expects lenders to follow their own written waiver policy.

Fannie Mae’s Selling Guide generally calls for escrow deposits on first mortgages. It advocates escrow, especially for first-time owners and borrowers with blemished credit. Freddie Mac’s Bulletin 2019-17 says it does not require escrow except for monthly borrower-paid mortgage insurance and where law requires it. It encourages escrow for first-time buyers, 2-4 unit homes and borrowers with under six months of reserves, among others.

Here is what waiving does and does not do. It does not lower your qualifying payment: taxes and insurance count toward your debt-to-income ratio whether or not they are escrowed. Across the wholesale programs Lendmire works with, the automated finding governs most files, with a total ratio ceiling of 50%. A waived escrow won’t help you reach that ceiling.

Here is where the general rule breaks:

• Borrower-paid monthly mortgage insurance. Escrow for that premium is required.
• Condo or planned unit development with a master policy. Fannie Mae does not require insurance escrow when the association carries a blanket policy. Taxes can still be escrowed.
• Certain refinances. Where taxes are financed into the new loan, escrow is required, subject to applicable law.
• Higher-priced mortgage loans. Federal rules require escrow on these for a minimum of five years. A typical prime conventional loan is not one.
• Waivers can be reversed. If you stop paying your tax and insurance bills, the servicer may start collecting again with written notice.

Don’t assume a down payment of 20% ends the discussion either. A waiver policy cannot rest on loan-to-value alone; it must also weigh whether you can handle lump-sum bills. For a fuller treatment, see Lendmire’s article Can You Waive Escrow on a Conventional Loan for a Primary Home?. Exact terms depend on the lender’s guidelines, property type, leverage, and a full review of the borrower’s file.

What Can Change After Closing

The servicer runs an annual escrow analysis. If taxes or premiums rise, the escrow portion rises with them. P&I stays the same on a fixed-rate loan, so the increase comes entirely from escrow.

Shortages happen when bills exceed the estimate. The servicer may spread the shortfall over future payments. Expect this possibility, especially in the first year after a purchase, when reassessment or an insurance change can alter the estimate. Keep some monthly breathing room in your budget rather than buying at the very top of what you can afford.

If you are shopping programs, know the envelope first. Lendmire’s conventional loan programs run to 97% loan-to-value for first-time buyers and 95% otherwise on a one-unit primary residence, with a 620 decision score as the wholesale floor. All figures are subject to lender guidelines and full file review.

Key Terms Defined

Principal: The part of your payment that reduces the amount you borrowed.

Interest: The cost of borrowing, charged on the remaining balance.

Escrow: An account the servicer holds to pay your property taxes and homeowners insurance when they come due.

Initial escrow deposit: The money you fund at closing to start the account, including a cushion of up to two months.

PITIA: Principal, interest, taxes, insurance and assessments, the housing expense counted in your debt-to-income ratio.

Escrow analysis: The servicer’s yearly review of the account that can reset your monthly escrow amount.

If you are buying a home and want to see whether a conventional loan fits your file, Lendmire can help you compare the options and what each one asks of you.

For your own numbers, request a scenario review with Lendmire.

About Lendmire

Lendmire, NMLS# 2371349, is a mortgage brokerage with consumer lending licenses in 16 states. FHA, VA, conventional and jumbo purchase and refinance loans are arranged through wholesale lending partners, and each application is reviewed individually by the lender. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.

References

1. CFPB – Loan Estimate explainer

2. CFPB – Sample Closing Disclosure

3. CFPB – Ask CFPB: escrow limits

4. Fannie Mae Selling Guide B2-1.5-04, Escrow Accounts

5. Freddie Mac Bulletin 2019-17