Hi @John Vang!
Here's how I explain this to Buyer's.
There are three main things that could cause you to default on the loan (which would likely make it less profitable for the lender).
1) You don't pay your taxes, you get a tax lien on your property, you foreclose, the lender loses money.
2) You have significant damage to your property, in theory you might not have the cash on hand to fix it (thus insurance), and you can't stay in the property, maybe stop paying your payments, you foreclose, the lender loses money.
3) You don't pay your mortgage because of a life event that changes your income (thus why lenders underwrite you with stricter standards than pre 2008), you foreclose, the lender loses money.
Even if you can poke some holes in my reasons above, if you're curious why something is a certain way, follow the money. Lenders are investors themselves and this is their way of protecting their investment. Also, the money in escrow are still your funds. They are just earmarked for those future expenses.
Hope this super simplistic way of thinking through the extra payments into escrow helps. Good luck on the first house hack!
