An escrow account is a special account your lender sets up if your mortgage payments will include amounts for property taxes and homeowner's insurance and the lender or mortgage servicing company will be disbursing the money when these bills become due. Homeowner's insurance is typically at least several hundred dollars on the average home, and property taxes can be several thousand dollars or more. If you have trouble saving for large expenses, escrow accounts can make it easier because each month you pay one-twelfth of the annual amounts needed. However, you're paying the money before it's really due and in most cases not earning any interest on it.

Lenders can easily make mistakes in escrow accounts, so it's important to keep an eye on them and make sure all the money is accounted for and that you're not paying more than is necessary. By law, there has to be at least one month per year when the balance in your account is no more than one-sixth of your annual expenses paid from escrow. Once a year your lender will perform an escrow analysis to determine how much money should be deposited into the account for the coming year in order to cover the expenses that will be paid. If you have more than $50 in excess of what's needed, you should receive a refund. If you have a shortage, one-twelfth of the amount needed may be added to your monthly payments for the next year.