What is the purpose of an escrow account in the mortgage process?

The purpose of an escrow account in the mortgage process is primarily to manage property taxes and insurance payments. When homeowners have a mortgage, lenders often require them to set up an escrow account to collect funds gradually throughout the year for these necessary expenses. Each month, a portion of the mortgage payment is deposited into the escrow account, ensuring that when property taxes and insurance premiums are due, the funds are readily available for payment. This practice helps ensure that homeowners remain compliant with tax obligations and maintain adequate insurance coverage on their property, thereby protecting both the homeowner and the lender's investment.

An escrow account also provides peace of mind to homeowners, as it reduces the risk of missing payments that could result in penalties or loss of coverage. By centralizing these payments, lenders can help borrowers manage costs more effectively and help avoid large lump-sum payments that could be financially burdensome.