What Is Escrow?

Whenever you're purchasing a home, there are many costs associated with it.

Many of those costs must be "Escrowed" to start off, meaning sums of money put in charge of by a third party to cover those extra costs. Within your mortgage alone are costs referred to as PITI: Principle, Interest, Taxes and Insurance.

• Principle is the amount of money put towards the balance of your loan (usually smaller at first) growing as your mortgage matures.

• Interest is the money (as determined by your interest rates) paid to the bank for carrying your mortgage.

• Taxes are the usual taxes paid to your city/state (based on where you live), rolled into your mortgage.

• Insurance is at least your hazard-insurance (and home-owners' insurance if you have it as well) is also rolled into your mortgage.

Now those items, Taxes and Insurance particularly, can be large annual payments. To help the average homeowner manage those big numbers, the common practice is to include them in the mortgage payment. You'll typically pay 2 to 6 months "up front" to get the escrow account started.

This way the mortgage company assures that the city and insurance-company ongoingly get paid and there's never one month where you have to write a giant check from your checkbook to cover these expenses as the rest of the payments are not billed to you (you will just receive the statements and/or invoices).

Now, don't get me wrong - these are not the ONLY additional expenses - just the most common ones. You might also "escrow" special assessments, private mortgage insurance as well as other "large lump sum" items that otherwise could land in your bill pile unexpectedly and ruin your budget for the month.

Where it seems like a lot of money to come up with for closing, it is in your benefit for the long term to structure your accounts and payments this way. And as always, your lender will advise you on the details of this as you get close to closing on your new home.