Mortgage Escrow Account

This is an amount of money maintained at a lending institution in order to pay
the annual taxes and insurance on mortgaged property. Approximately one-twelfth of
the estimated annual cost of taxes and insurance is paid into the account each month
from the borrower’s monthly mortgage payment. Then the lending institution pays the
taxes and insurance from this account when they are due. An escrow account is
required by many lending institutions in order to insure that the taxes and insurance
premiums are paid on time.
It is, in a sense, a budgeting device which requires borrowers to set aside
enough money to pay their taxes when due. If there is not enough money in the
customer’s escrow account at the time of tax payment, sometimes lenders will advance
the funds at no charge, and allow the customer to pay back the advance through higher
escrow payments.
Escrow accounts also reduce tax collection costs for local governments. The
lending institution usually makes one large tax payment to each tax collector, which
saves the government the cost of collecting many small checks from individual
borrowers over a period of time.