An escrow account is a separate account that holds funds for the purpose of paying bills such as homeowner’s insurance and property taxes.
Funds to cover these expenses are deposited into the account each month along with your monthly payment and then pays the bills for you when they come due.
By taking the annual amounts charged for homeowner’s insurance, property taxes and other annually paid items and dividing them by 12, the escrow department establishes a payment amount that is added to your monthly principal and interest payment.
Spreading the cost of these expenses over 12 months makes it easier for you to budget those expenses, and you won’t have to come up with additional cash when bills are due.
For some loans, escrow accounts are a requirement.