An escrow account makes your life easier and benefits your lender. The escrow holds money for some of your home bills, such as taxes and homeowners insurance. You pay the escrow amount with your monthly mortgage payment, and the lender manages the account. An escrow is not always optional, since lenders may require you get one as part of your loan approval.
You'd have a bunch of payments to keep track of without an escrow account. Your school, town or city and county taxes may have different due dates and need to be sent all over the place. Since the escrow is one combined payment that's part of your monthly mortgage bill, you don't have to deal with the individual bills for the escrow items. Budgeting is easier because you pay smaller amounts throughout the year instead of having to cough up a large wad of cash at one time.
No Late Fees or Coverage Lapses
The lender is responsible for your escrow account. So if a payment is late, under federal law the lender has to cover the late fees as long as your loan is current. Since most lenders have systems in place to handle escrows, a lender is less likely to miss a payment than a borrower. Missing escrow item payments can have consequences beyond money penalties. If you're late on your homeowners insurance, for instance, the insurer can cancel your coverage.
An escrow protects the lender's investment in your home too. If you don't pay your homeowners insurance on time and your uninsured home burns down, the lender could lose the money it lent you. Real estate tax collectors can take ownership of a home for unpaid property taxes, and the fees and interest on late tax payments can add up quickly.
Surplus or Shortage Considerations
Your lender looks over your escrow each year to make sure you're putting enough cash into the account to cover all your escrowed bills. You may receive cash back from the account if you have too much money in there when the escrow is reviewed. However, the lender may raise your escrow payment based on expected increases, such as a hike in your property taxes.