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An escrow payment is the portion of a mortgage payment that is set aside in an escrow account that will pay for the taxes and homeowner's insurance. This is placed in escrow to show the money is guaranteed to be there and is an amount over and above the monthly mortgage payment, including principal and interest. It is placed in escrow because insurance and property taxes are required to be paid while the home still has a loan on it, the same way insurance must be carried on a vehicle during its loan term.
The amount of the escrow payment is calculated by estimating the insurance and property tax costs for the year and dividing the sum by 12. Even with a fixed interest rate, the total amount of the mortgage payment can still change on an annual basis as a result of increases in the insurance premium or an increase in local property taxes.
When a home is purchased, it is required that the first year's amount for taxes and insurance are placed in escrow to cover the first year's payments. Making on-time mortgage payments every month will send a portion of the payment to escrow to cover the taxes and insurance for the year. If all payments are made on time for the year, at the end of the year, the money in escrow is withdrawn to cover the expense. This process repeats year after year, with adjustments to the monthly payment to account for increases in policy premiums and property taxes.
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