Escrow accounts are established by mortgage lenders to manage property taxes and homeowners insurance payments on behalf of the borrower. These funds are collected monthly as part of the mortgage payment. The purpose is to ensure these critical property-related expenses are paid on time, protecting both the lender’s investment and the homeowner’s equity. For example, if a homeowner’s annual property tax is $6,000, the lender might collect $500 monthly through the escrow account to cover the bill when it is due.
The primary benefit of an escrow account is its role in preventing property tax liens and policy lapses, thus minimizing risk for both parties. Historically, escrow accounts became commonplace to address increasing rates of property tax delinquency during periods of economic hardship. Maintaining sufficient funds within these accounts ensures the consistent payment of these obligations, even when individual homeowners might face financial challenges.
