An escrow (or impound) account is held by your lender to pay your property taxes and homeowners insurance on your behalf. Each month, 1/12 of the annual tax and insurance bills is added to your mortgage payment, the lender holds the money, and pays the bills when due.
Escrow is required on most government loans (FHA, VA, USDA), almost all loans above 80% LTV, and any loan where the borrower elects it. Escrowing simplifies budgeting and protects the lender's collateral by ensuring taxes and insurance never lapse.
Each year the lender does an escrow analysis. If your tax or insurance bills went up, your monthly payment will increase to cover the shortage. If they went down, you'll get a refund and a lower payment.