An escrow account (sometimes called an impound account) is held by the mortgage servicer to pay property taxes and homeowners insurance. Part of each monthly payment goes into it, and the servicer pays the bills when they're due. An initial deposit is usually collected at closing, and the account is reviewed annually.
Escrow explains two things buyers ask about: why cash to close includes 'prepaids', and why a payment can change on a fixed-rate loan when taxes or insurance go up. It's also different from the escrow that holds earnest money during a transaction.
Example: with annual taxes of $4,680 and insurance of $2,125, about $567 a month goes into escrow, and the lender may collect a few months' cushion at closing.
Yes. The principal and interest stay fixed, but the escrow portion changes when property taxes or insurance premiums change.
Often, especially with low down payments or government-backed loans. Some borrowers with larger down payments can waive it, depending on the lender.
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