An escrow account is a separate account where your lender holds funds to pay your property taxes and homeowners insurance on your behalf. Each month, a portion of your mortgage payment goes into this account, and your lender pays these bills when they're due. It takes the guesswork out of budgeting for large annual or semi-annual expenses and ensures these critical payments are never missed.

Some lenders require escrow accounts, especially if you put down less than 20%. Once you build sufficient equity, you may have the option to manage these payments yourself.