An escrow is a financial arrangement in which a neutral third party holds and regulates payment of the funds required for two parties involved in a given transaction. In the mortgage business, escrows are commonly used to ensure that the funds for property taxes and insurance are set aside and paid on time.

When buying a home, most lenders require that the borrower establish an escrow account to ensure that property taxes and insurance payments are made on time. This protects the lender's investment in the property and ensures that the borrower's payments are consistent throughout the life of the loan.

The process of setting up an escrow account usually starts when the lender provides the borrower with an escrow account disclosure statement. This statement includes information on the estimated property taxes and insurance premiums, as well as the escrow payments that will be required each month. The borrower will then need to deposit funds into the escrow account, which will be used to pay the property taxes and insurance premiums when they come due.

The borrower will typically be required to make an initial deposit into the escrow account at closing, and then make monthly payments along with their mortgage payments. The lender will then use the funds in the escrow account to pay the property taxes and insurance premiums when they come due.

It's important to note that escrow payments can vary from year to year, based on changes in property taxes and insurance premiums. The lender is required to review the escrow account annually and make adjustments to the escrow payments if necessary.

As a prospective home buyer, it's important to understand that escrow payments are an additional expense to consider when budgeting for a mortgage. It's also a good idea to review the escrow account disclosure statement carefully, so you have a clear understanding of the escrow payments required and how they are calculated.

In conclusion, escrow accounts are an important aspect of the mortgage process, and are required by most lenders. They protect the lender's investment in the property and ensure that property taxes and insurance payments are made on time. Understanding how escrows work, and the costs and requirements associated with them, can help you make an informed decision when buying a home.