What is an escrow account and what items are typically escrowed?

• A. An escrow account collects funds for property taxes and homeowners insurance (and sometimes mortgage insurance); funds are held monthly to pay those costs.
• B. An escrow account holds funds for principal payments only.
• C. An escrow account is used to pay HOA dues exclusively.
• D. An escrow account holds funds for repairs.

Answer: (B)

An escrow account is a reserve that collects a portion of your monthly payments to cover major ongoing home-related expenses so they’re paid when they’re due. The typical items escrowed are property taxes and homeowners insurance, and sometimes mortgage insurance if the loan requires it. These costs are paid from the escrow as bills come due, which helps ensure they’re paid on time and protects the lender’s security interest in the property.

The principal portion of your mortgage payment isn’t held in escrow; it goes to reduce the loan balance. So escrow is not for principal payments. HOA dues aren’t usually paid from a standard mortgage escrow unless a lender specifically requires it, and funds set aside for repairs aren’t part of a normal mortgage escrow.