Answer: If your property were destroyed by fire, your lender would lose most of the security for its loan. Same thing if the place were sold at auction for unpaid taxes. So they want to make sure your insurance premiums and tax bills are paid on time. That's why they're collecting extra money from you every month, and paying the bills on your behalf.
Establishing that escrow account wasn't your choice. It was required as a condition of granting your loan. I've heard it's sometimes possible to change the arrangement later, but I'll bet it isn't easy.
In some states and for certain kinds of loans, lenders are required to pay a small rate of interest on the money being held. It never amounts to much. And frankly, given how little interest you could expect these days if you stashed that money in your own savings account, the whole thing isn't really worth fretting about.
Divorce And Mortgage
Edith: My daughter just went through a divorce and she is keeping the house. How does she keep the present mortgage with having to re-finance? I think I had read this in your column several months ago and you said it was quite easily done. --D.H.
Answer: If both of them were originally responsible for the mortgage loan, then both of them still are, whether they're both owners or not. I don't know whether their divorce papers have anything to say about your daughter's obligations. But as far as the lender is concerned, she doesn't need to take any action. The mortgage company simply wants someone to make the monthly payments on time.
If your daughter can't do that comfortably, then she shouldn't have agreed to keep the house, because she'd be asking for trouble -- but that's a different topic!