How does a mortgage escrow account work?

An escrow (or impound) account lets your lender collect a slice of your property taxes and homeowners insurance with each monthly mortgage payment, then pay those bills on your behalf when they come due. Your monthly payment is often quoted as PITI – principal, interest, taxes, and insurance – and the T and I sit in escrow. Each year the lender runs an analysis; if taxes or insurance rose, your monthly payment climbs to cover the shortfall, and you may owe a catch-up. If too much was collected, you get a refund. Most loans with less than 20% down require escrow. The upside is you never face a big lump-sum tax bill; the downside is less control over the timing and a payment that drifts upward over time.