What does an 'escrow account' typically fund?

An escrow account is designed to hold funds for future expenses related to property ownership, specifically property taxes and insurance. When individuals purchase a home, lenders often require borrowers to maintain an escrow account to ensure that these essential payments are handled in a timely manner. Funds paid into the escrow account from the borrower’s monthly mortgage payments are accumulated, allowing the lender to disburse them directly to the appropriate taxing authorities or insurance companies when payments are due.

By using an escrow account for these specific purposes, both the lender and borrower can ensure that critical payments are made on time, protecting the lender’s interest in the property and the homeowner's investment. This practice helps to prevent penalties or lapses in coverage, contributing to the stability of the mortgage and the homeowner's financial planning.

In contrast, funds for property appraisals, closing costs, or real estate commissions are typically handled differently and are paid directly at the time of the transaction or closing, rather than being accumulated in an ongoing account like an escrow account.