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What is an escrow payment?

An escrow payment is an amount deposited with another party and it is to be released only for its specified purpose.  The following is one example of an escrow payment.

A borrower and lender arrange for the borrower's monthly mortgage payment to include an amount equal to one-twelfth of the property's annual real estate tax. Assuming the annual tax is $6,000 the monthly mortgage payment will include an escrow payment of $500. When the lender receives these monthly escrow payments of $500 each, the lender must hold them in escrow, or hold the funds in an escrow account. When the annual real estate taxes come due, the lender pays the real estate taxes by using the money in the borrower's escrow account.