What is an escrow account and how does it work?

An escrow account can be created to ensure that real estate tax and insurance bills are paid in full and on time, without the borrower having to save large amounts of money and keep track of various due dates. An escrow account is a separate account that the lender sets up to hold the money it collects each month for real estate taxes, homeowner’s insurance premiums, and if applicable, flood or mortgage insurance. The lender determines the estimated annual real estate taxes and insurance premium expenses and divides that amount by 12. This amount is added to the monthly mortgage payment. The borrower’s real estate and insurance bills are sent directly to the lender and they are paid with the escrowed funds. Many borrowers find this to be a more convenient way of paying necessary costs.