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Escrow
Definition
Escrow is a financial arrangement where a third party holds funds on behalf of two parties involved in a transaction, often used for property taxes and insurance.
Explanation
In mortgages, an escrow account is set up by the lender to collect property taxes and homeowners insurance premiums as part of your monthly payment. The lender pays these bills from the escrow account when they are due, ensuring they are paid on time.
Escrow protects the lender's collateral (your home) by ensuring taxes and insurance are current. Some loans require escrow, while others allow you to pay taxes and insurance directly.
Example
Annual property taxes of $3,600 and insurance of $1,200 = $480/month in escrow on top of the mortgage principal and interest payment.