what is escrow on a mortgage

An escrow account is a type of holding account managed by your lender or mortgage company to pay your bills on time. When you close on a mortgage, your lender may set up a mortgage escrow account where part of your monthly loan payment is deposited to cover some of the costs associated with home ownership, such as real estate taxes, insurance premiums, and private mortgage insurance. The lender will calculate your annual tax and insurance payments, divide the amount by 12, and add the result to your monthly mortgage statement. Each month, the lender deposits the escrow portion of your mortgage payment into the account and pays your insurance premiums and real estate taxes when they are due. Your lender may require an “escrow cushion,” as allowed by state law, to cover unanticipated costs, such as a tax increase. The escrow account is an easy way to manage property taxes and insurance premiums for your home, and it ensures that payments are made on time to third parties, such as county taxing authorities and insurance companies.