Along with the principal and interest in a monthly mortgage payment, sometimes clients choose, or are required to have their real estate taxes and homeowners insurance wrapped into the same payment. This is called an escrow or an impound account. The reason for this is to ensure that the taxes and insurance will be paid on time. This protects the client and lender from any liens or further liabilities. The lender collects one-twelfth of the estimated annual bill for taxes and insurance each month.
Escrow account balances should generally be on track for the due dates, but the account can legally hold a two month surplus in case of an shortage. Since taxes and insurance fluctuate yearly, your payment may adjust based on any increase or decrease. Some clients like this feature in a mortgage because it helps make sure all the bills are paid on time.
Conventional loans have an option where you can pay the taxes and the insurance on your own and not have an escrow account established. Sometimes with conventional loans, you can have the taxes collected and waive the insurance. Conventional loans allow for more customization and a choice for an escrow account, but FHA requires an escrow account every time. Not all, but the majority of VA loans require an escrow account as well.