What is an escrow account used for?

An escrow account is primarily used to hold funds designated for specific expenses related to real estate, such as property taxes and homeowners insurance. When a borrower takes out a mortgage, the lender may establish an escrow account to ensure that there are sufficient funds available to pay these recurring expenses when they come due. Monthly mortgage payments often include an additional amount that contributes to the escrow account, providing financial management and reducing the risk of the homeowner defaulting on these important payments. This mechanism helps protect both the lender’s and the homeowner’s interests by ensuring that necessary expenses are paid on time, maintaining the property’s value and keeping it insured against potential risks.

This function is distinctly different from managing rental agreements, facilitating loan applications, or storing mortgage documents, which do not involve the financial management or safeguarding of funds for specific obligations related to property ownership.