A separate account your lender uses to collect and pay your property taxes and homeowners insurance for you. Spreads those big bills over 12 monthly payments instead of two annual ones.
Escrow is one of those words that means different things in different parts of the home-buying process. For most homeowners, "escrow" refers to the account your lender uses to collect and pay your property taxes and homeowners insurance on your behalf.
Here's how it works: your lender adds roughly 1/12 of your annual tax bill and 1/12 of your insurance premium to each month's mortgage payment. When the tax or insurance bills come due, the lender pays them out of the escrow account. You don't have to remember a $4,800 property tax bill in November — it's already paid because you've been putting money aside each month.
"Escrow" also refers to the holding period during closing, when a third-party agent holds your earnest money and the deed until both sides are ready to finalize the sale.
Example
If your annual property tax is $4,800 and homeowners insurance is $1,800, your escrow adds about $550/month to your mortgage payment ($400 tax + $150 insurance). On a $2,022 P&I, your total monthly payment to the lender is about $2,572.
Also known as
impound account, escrow account