Escrow account - A separate account into which the lender puts a portion of each monthly mortgage payment; an escrow account provides the funds needed for such expenses as property taxes, homeowners insurance, mortgage insurance, etc.

Mortgage companies typically cover shortages when tax or insurance payments increase. It is very common for mortgage companies to pay taxes and insurance premiums when they are due even though all the money for these bills has not yet been collected from the homeowner.

When you buy a house, you will probably have an escrow account with the lender. The amount of money you pay each month has extra above what would be required for just your principal and interest. The extra money is held in your escrow account to pay property taxes and insurance when they come due.

Escrow accounts can be great for borrowers with little or no savings so that when these items become due they are not responsible for the lump sum payments.

Some lenders require Taxes and Homeowners insurance to be escrowed as a safeguard to protect the lenders interest in the property.

You can choose to waive escrow and pay your insurance and taxes on your own. Lenders will usually charge a small fee for waiving escrows.

You may also here the term escrow used for a different account. This would be the escrow account where your earnest money would be held until the closing. Usually the title company or closing attorney will hold these funds.

Banks "escrow" property tax and hazard insurance premium payments to protect the banks' interests. In the event of a foreclosure, the mortgagee's lien takes priority over all other claims, EXCEPT for government tax liens. If the homeowner does not purchase hazard insurance, the home is not covered against catastrophic loss. In the event of a catastrophe that causes damage to the home, and the homeowner is financially unable to make repairs, the value of the home will decrease. Therefore, banks will require the homeowner to put sufficient monies into an escrow account from which the bank will make property tax and insurance premium payments, on behalf of the homeowner, when they become due.

Most lenders require escrow accounts unless you have a 20% down payment.

The escrow holder is required to safeguard the funds while they're in their possession, and to disburse funds or convey title, only when all requirements of the escrow have been met.