How Escrow Works

• Banks providing mortgages set up escrow accounts in the names of homeowners to save capital that eventually goes toward paying taxes and insurance on the property for which the bank provided the mortgage. These accounts work something like a savings account but technically qualify as a different entity. The question of whether you pay taxes upfront through an escrow proves something of a semantic thicket, because you don't technically pay your taxes if you put money into an escrow account.
  
  

Accruing Tax in Escrow

• When you make monthly mortgage payments, the bank receiving those payments takes a portion of the payment and places it in an escrow account. Banks calculate the amount of monthly payments with escrow accounts in mind. Property taxes and insurance fees come due every six months and are generally expensive. By putting money into an escrow account each month, mortgage holders slowly accrue capital for taxes through incremental payments, rather than facing the burden of making substantial payments every six months. With escrow accounts, you pay taxes little by little.
  
  

Paying Taxes Through Escrow

• Technically, the answer to whether you pay taxes upfront through an escrow is "no" for two reasons. When you pay into an escrow account, you put money aside for the eventual payment of taxes. Thus, while you pay money upfront for taxes, the escrow account manager makes tax payments as they come due. Furthermore, the bank or mortgage lender assume responsibility for making all escrow payments with funds from an escrow account, meaning that technically, you don't pay escrow taxes at all, the bank does. You provide the money, but the bank completes the actual paying. Simply put, you pay taxes when they come due through an escrow account, not upfront.
  
  

Escrow Funds Due Upon Purchase

• In some property transactions buyers must make a set number of escrow payments upfront as part of the purchase arrangement. Upfront escrow payments usually constitute six to nine months worth of property tax and insurance fees. This constitutes a one-time payment and does not actually go toward paying taxes or insurance, but goes into the escrow account as a form of insurance for the bank providing the mortgage. In such transactions buyers do make up-front tax payments for an escrow account, but this payment only covers a period of months, not all taxes due on a property.