What is the primary purpose of escrow accounts in residential mortgage transactions?

• A. To accumulate funds for taxes and insurance.
• B. To fund principal payments only.
• C. To pay HOA dues exclusively.
• D. To cover only mortgage insurance.

Answer: (A)

Escrow accounts exist to ensure property-related expenses are paid on time. In a residential mortgage, part of your monthly payment goes into an escrow fund, which is used to cover annual or semiannual property taxes and homeowners insurance when those bills come due. This protects the lender’s security by preventing tax liens or gaps in insurance that could jeopardize the property.

So the primary purpose is to accumulate funds for taxes and insurance, ensuring those obligations are met as they come due. Mortgage insurance or HOA dues may be included in escrow in some cases, but they’re not the main reason escrow accounts are used.