What is an escrow account?

An escrow account is designed to hold funds that are used for specific, agreed-upon purposes, typically related to real estate transactions. In the context of property financing, an escrow account is primarily utilized to manage the borrower’s property taxes and homeowners insurance premiums. This account is managed by a third party, often the lender or a designated escrow agent, who collects a portion of the borrower’s monthly mortgage payment and places it into the escrow account. When the property taxes and insurance premiums come due, the third party disburses the necessary funds to cover these expenses on behalf of the borrower.

This arrangement helps ensure that property taxes and insurance are paid on time, thereby protecting the lender's interest in the property and helping the borrower avoid potential legal issues or lapses in coverage. It also allows borrowers to spread these costs over the year instead of having to pay them all at once, making budgeting easier.