There are two uses of the term 'escrow' in connection with mortgages. One involves an independent third party (such as a bank) to hold the funds for the purchase of the home before closing.

The other is an account in which the mortgage lender deposits funds received from the borrower for paying future costs associated with the home, such as property taxes and insurance. These bills are due at particular times of year, but the lender bills the borrower for 1/12th the amount with each monthly installment to spread out the cost. Until the bills are paid, the funds are kept in an escrow account. The minimum balance on an escrow account is typically two months worth of escrow payments. The escrow balance will be adjusted at least once a year for changes in the bills paid from the escrow account. In most cases the lender will pay interest on the escrow account.