An escrow account isn’t necessarily specific to a mortgage transaction. Technically, an escrow account refers to money held in reserve by a third party for the purpose of two other parties conducting a transaction. However, an escrow account is most often used in the context of paying annual expenses associated with your mortgage, like property taxes and insurance premiums. When you close your loan, part of your closing costs will be funding your escrow account such that adequate funds will be available from the account when your annual expenses are due. This part of your closing costs is also referred to as “pre-paids” or “impounds”. In most instances, part of your monthly mortgage payment will likewise be for building up the required reserves in escrow to pay your annual expenses the subsequent year.
