Investopedia defines escrow as: A financial instrument held by a third party on behalf of the other two parties in a transaction. The funds are held by the escrow service until it receives the appropriate written or oral instructions or until obligations have been fulfilled.
In the case of a home purchase, the lender or mortgage holder, takes funds from the buyer to pay taxes and insurance. The funds are “escrowed” until the time they are due when the lender sends payments from the escrow account to the appropriate tax department and/or insurance provider.
Lenders usually require that borrowers pay money monthly into “escrow” so that the lender can pay the real estate tax and property insurance as due.
If you decide to “escrow” your taxes and insurance, at closing you will see on the HUD1 statement that monies have been taken from you to cover the next 12 month’s worth of property insurance and property taxes. That is so the escrow company will have enough money set aside by you to cover the first payment you need to make for your taxes and insurance on the property you are purchasing.
