What is an escrow account and what is it used for in mortgages?

• A. An escrow account holds funds for loan origination fees.
• B. An escrow account holds funds for property taxes and homeowners insurance, and sometimes mortgage insurance, to ensure timely payments.
• C. An escrow account is used to lock in interest rates.
• D. An escrow account is only for late fees.

Answer: (B)

An escrow account is a reserve the lender maintains to pay recurring property-related bills on your mortgage. Each month, part of your payment goes into this account, and the funds are used to cover things like property taxes and homeowners insurance, and sometimes mortgage insurance if your loan requires it. The lender handles the payments to the tax authority and the insurance company when they’re due, which helps ensure bills are paid on time and reduces the risk of a lapse that could threaten the loan.

In practice, you’re budgeting your total monthly housing payment to include this escrow portion, so you don’t face large lump-sum bills. If taxes or premiums rise, the lender may adjust the escrow portion to cover the higher costs, and you’ll see a change in your monthly payment. Some loans also allow escrow for mortgage insurance if required, while others may let you pay those costs separately if you opt for an escrow waiver.