If you’re a first-time home buyer, you might feel overwhelmed and slightly inundated with all the information and steps involved with owning a house. If you’ve never owned a house, the term escrow might sound like a foreign concept and an escrow insurance account might feel complicated but we’re here to break it down for you. Understanding how escrow works can help you avoid surprises and better manage your finances.

An escrow insurance account is a separate account your mortgage lender manages on your behalf. It’s used to collect and pay certain house-related expenses; most commonly these expenses are property taxes and homeowners insurance. With an escrow insurance account, homeowners do not have to pay the large bill at once. Instead, the homeowner pays a portion each month as part of their mortgage payment.

Your lender estimates your annual insurance and tax costs then divides it by twelve (for the twelve months in a year). The lender adds that monthly cost to your monthly mortgage payment. When your insurance premium and property tax is due, the lender pays the bill directly from the escrow account. You don’t have to worry about underpaying because most lenders include a “cushion”—which is allowed by law—to avoid surprise bills.

While the idea of someone else paying your taxes and insurance premium might sound a bit like micromanaging, the reality is it’s reassurance for the lender that your taxes won’t go unpaid and the policy will not lapse. You can be assured that the lender will perform an annual escrow analysis to compare what was collected versus what was paid. And if there is a surplus, you’ll receive a refund or your future payment(s) will be decreased.

If you’re able to put down a large downpayment on your house or have a considerable sum of money sitting in the bank, you may be able to waive escrow.

The bottom line is that the escrow insurance account is a budgeting tool designed to make homeownership predictable and less stressful—since you’ll need to budget repairs and general maintenance. It is important to review your escrow statements and understand the adjustments and changes. Staying aware of your statements will help you avoid payment shock and you’ll know when it might be time to switch homeowner insurance providers.

And at any point you determine something is off, you should reach out directly to your agent because it is your money!