An escrow account is a lender-managed account that collects a portion of your monthly mortgage payment to pay property taxes and homeowners insurance on your behalf. It prevents lapses in coverage and ensures these bills are paid on time.
With a mortgage that has escrow, your monthly payment includes a property tax reserve and a homeowners insurance reserve beyond principal and interest. Your servicer holds those funds in a dedicated account and pays your tax bill and insurance premium directly when due. As the CFPB explains, the money comes from a portion of your monthly payment and the servicer manages disbursements.
Lenders require escrow to protect their collateral. Unpaid property taxes can create a tax lien that takes priority over the mortgage; a lapsed insurance policy leaves the home uninsured. Most federally backed loans (FHA, VA, USDA) require escrow; many conventional lenders do too unless you have significant equity.
Under RESPA, lenders may collect up to one-twelfth of total annual escrow payments each month plus a cushion of up to two months. Each year, your servicer performs an escrow analysis and adjusts your payment. If a surplus accumulates above the RESPA cushion, the servicer must refund it. The CFPB's escrow rules cover the framework.
At closing you'll pay an initial escrow deposit — typically 2–3 months of taxes and insurance — to pre-fund the account. It appears on your Loan Estimate and Closing Disclosure as part of your closing costs.