What is escrow on a mortgage and why is it part of the monthly payment?
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Escrow is an account that holds money relevant to the mortgage property, but is not owed to the bank. It is most common to hold future payments of property insurance and property taxes. A very typical setup is that the escrow receives a portion of each monthly payment and then disburses to cover property insurance and property tax payments maybe every three, six, or twelve months depending on the terms. Escrow is often required by the lending institution because insurance is required by them to protect the property against losses, and property taxes must be paid on the property or else the government will have a claim against the property. If the mortgage is paid off the escrow goes away and maintaining the insurance and taxes is solely up the owner to arrange.
An escrow account also accrues interest on the money in the account and pays out to the property owner.
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