What Is Escrow?
Escrow is money that you have earned, paid taxes on, and then agreed to give to someone else to hold on your behalf. For example, when you take out a mortgage loan to purchase a house, the lender is named on the property title of that house as the “lien holder”. This identifies that the house is the collateral property that the bank has an ownership interest in, until you pay off the loan. So if you don’t pay the loan, the bank is “first in line” to take physical possession of the property and basically, kick you out to the curb.
With real estate property, there are certain bills that have to be paid on a regular basis. Property taxes are one of those bills. If you don’t pay your property taxes, then the taxing authority (usually the county) will “take possession” of your property and kick you to the curb. The bank that lent you the money to buy the house with, doesn’t want that to happen – otherwise the bank could lose their money too. Besides, if you’re not paying your property taxes, you’re probably not making those loan payments to the bank either. The bank is in this to make money, and they’re not about to risk losing a $200,000 property to the taxing authority, because you didn’t pay a $1200 property tax bill.
To protect their interest, the bank will require you to include as a part of your house payment each month, a pre-determined amount of money that is in addition to the loan payment. This additional money is placed in an escrow account. It’s still your money. But the bank has possession of it. The bank will use your money in the escrow account, to pay your property tax bill when it’s due. Understand that since escrow money is your money, the bank isn’t paying the property tax – you are. The bank just pays it with your money, on your behalf. That way, the bank has no doubt, taxes are paid and they are not at risk of losing their collateral to someone else. So money in escrow is NOT a deduction EVER on any tax return, so long as it remains in the escrow account.