An escrow account is a separate account that holds funds for the purpose of paying bills such as homeowner's insurance and property taxes. The lender collects the funds to be deposited into the account each month along with your monthly payment and then pays the bills for you when they come due. By taking the annual amounts charged for homeowner's insurance, property taxes and other annually paid items and dividing them by 12, a payment amount is determined and is added to your monthly principal and interest payment. Spreading the cost of these expenses over 12 months makes it easier for you to budget those expenses and you won't have to come up with additional cash when bills are due. For some loans, escrow accounts are a requirement.