Escrow during a home purchase
In a purchase transaction, escrow refers to the neutral party that holds deposits, coordinates signed documents, receives lender funds, and makes sure money only moves once all conditions are satisfied. Because neither the buyer nor the seller controls the money in the middle, escrow gives both sides confidence that the deal will close on agreed terms. The fee for this service shows up as part of your closing costs.
Escrow after closing
After the loan closes, your lender may maintain an escrow account for property taxes and homeowners insurance. Part of each monthly payment is collected and held so those bills can be paid on time. This is why your total payment is often quoted as PITI — principal, interest, taxes, and insurance — rather than just principal and interest.
A quick example
If your annual property taxes are $6,000 and your insurance is $1,800, your lender collects about $650 a month into escrow. When the tax and insurance bills come due, the lender pays them from that account, so you are not hit with two large lump sums each year.
Why the number changes
Monthly escrow can rise if your tax bill or insurance premium increases. That can change your mortgage payment even when your principal and interest stay the same. Lenders run an annual escrow analysis and may adjust your payment or issue a shortage or surplus. Knowing your escrow amount early also keeps your cash to close accurate, since some months of taxes and insurance are usually collected upfront at closing.