If you're paying your property taxes and homeowner's insurance as part of your home loan payment, you may want to know how an escrow account works.

Basically, all year long your lender collects monthly payments called "reserves" that go into an escrow account to pay your property taxes and whatever kinds of insurance you're required to carry (homeowner's, mortgage, flood, etc.). At the time your property tax and insurance payments are due, your lender will have collected enough to make these payments in full. This relieves you of the responsibility of budgeting for these items yourself in addition to your monthly loan payment.

At the time of your closing, your lender may require you to fund some portion of these accounts.

Yes, it very well could if property taxes or insurance charges change. Since property taxes are based on a tax assessor's valuation of your home, they can increase or decrease over time. Your lender will examine your escrow account periodically to determine if the current monthly deposits you make will cover the tax and insurance bills when they're due.

Usually, the annual changes to your payments are minor. In a hot real estate market though, your payments could make a substantial jump if your home's value rises significantly and you're assessed a much higher property tax.