An escrow account is held by the lender to pay your taxes, insurance and
mortgage insurance as they become due. Usually, your monthly payment will
include 1/12th of your annual taxes, 1/12th of your annual insurance and 1/12th
of your mortgage insurance. The lender will pay these items as they become due.
If your escrow account does not hold sufficient funds to pay these bills when
due, you will be charged the difference. Often lending institutions allow you to
make up the shortage over a period of months, which results in an increase in
your monthly payment. When your loan is paid off, either by sale or refinance,
the balance in the escrow account is refunded to you.
