Understanding Points, PMI & Escrow: Your Real Estate Guide

Your Home Buying Journey

Welcome to your home buying journey! You've found a dream house and are excited about making it yours. But before you can close the deal, there's some mortgage lingo you need to understand—points, PMI, and escrow. These terms might seem intimidating now, but once we break them down, you'll feel more confident heading into your closing.

Understanding Points, PMI, and Escrow

Points

Points are a type of upfront cost paid directly to the lender when securing a mortgage loan. Essentially, they're a percentage of the total loan amount that can be used to lower your interest rate. Each point typically equals 1% of the total loan.

For example, if you take out a $200,000 mortgage and pay one point upfront, you would pay an extra $2,000. In return, this might reduce your monthly payments by lowering your interest rate.

PMI (Private Mortgage Insurance)

PMI is required when the down payment on your home purchase is less than 20% of the home's value. This insurance protects the lender in case you default on your mortgage.

If you're buying with a low down payment, PMI can be a significant cost. However, once you reach 20% equity in your home (through paying off the loan or an increase in property value), you can typically cancel this insurance.

Escrow

Escrow is a neutral third party that holds and disburses funds on behalf of both parties involved in a transaction—usually when buying or selling real estate. Here’s how it works:

1. **Closing Costs**: At closing, your escrow account will be set up to hold any costs related to the purchase such as title insurance, property taxes, and home inspections.

2. **Property Taxes & Insurance**: After you take ownership of the house, monthly payments for these will go into your escrow account. These funds are then used by your lender to pay your annual property tax bill and maintain homeowners' insurance.

1. **Points**: Consider points if you want to lower your interest rate; they’re an upfront cost but can save money over the life of the loan.

2. **PMI**: If you're putting down less than 20% on your home, PMI will be a factor. Make sure to understand when and how you might avoid this insurance.

3. **Escrow Account**: This is just another expense, but it helps manage costs like property taxes and insurance, ensuring payments are made in full.

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Photo by Thirdman • Published June 28, 2026