Escrow

In mortgage lending, escrow is a holding account your loan servicer maintains to pay your property taxes and homeowners insurance on your behalf. Each monthly mortgage payment includes a slice earmarked for escrow; when the tax bill or insurance premium comes due, the servicer pays it from the accumulated balance.

Lenders require escrow on most loans with small down payments because unpaid property taxes create liens senior to the mortgage — escrow protects their collateral. For borrowers, it converts two large, lumpy annual bills into smooth monthly amounts.

The practical details worth knowing: your “mortgage payment” is really PITI — principal, interest, taxes, insurance — and only the P&I part is fixed by the amortization formula. The escrow portion gets recalculated annually, which is why your payment can rise even on a fixed-rate loan: tax assessments and insurance premiums went up, not your rate. Servicers may also hold a legally capped cushion, and an annual escrow analysis reconciles overages (refunded) and shortages (billed or spread across next year’s payments).

The word also describes the neutral holding of funds during a home purchase (“in escrow”) — same concept, different stage: a third party holds money until contractual conditions are met.