Escrow.

In plain English

Escrow has two main meanings in personal finance. (1) During a home purchase, an escrow company holds the buyer's deposit and sale documents until closing conditions are satisfied, neutral middle ground between buyer and seller. (2) On an existing mortgage, your lender often collects extra each month for property taxes and homeowner's insurance, holds it in an escrow account, and pays those bills on your behalf when they come due. The escrowed amounts make your monthly mortgage payment higher than just principal and interest.

01Why it matters

If your mortgage payment is, say, $2,400, that's typically not all going to the loan. Often $400-$700 of it is escrow for property taxes and insurance. Knowing the breakdown helps you understand your real housing cost and catch escrow shortages, when property taxes go up or insurance premiums increase, your monthly payment will rise too, sometimes by hundreds of dollars.

02The math, step by step

You buy a $400,000 home with a mortgage. Principal + interest = $1,800/month. Your property tax is $6,000/year ($500/month) and homeowner's insurance is $1,800/year ($150/month). Your full monthly mortgage payment is $1,800 + $500 + $150 = $2,450. The lender takes the $650 escrow portion and pays your tax and insurance bills directly when due.

Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.

03What this is NOT