What is the primary purpose of an escrow account?

The primary purpose of an escrow account is to manage funds for property taxes and insurance. When a homeowner takes out a mortgage, they may be required to establish an escrow account as a way to ensure that certain obligations are met in a timely manner. This account collects monthly payments from the homeowner, which are then used to pay property taxes and insurance premiums when they come due.

This system benefits both the lender and the homeowner. The lender is assured that these critical expenses are handled on time, reducing the risk of tax liens or lapses in insurance coverage that could jeopardize the property. Additionally, homeowners avoid the potential burden of having to manage significant lump-sum payments for these obligations, making budgeting and financial planning simpler.

Other options presented, such as saving for home renovations, holding buyer deposits during negotiations, and paying agents' commissions, do not reflect the specific role of an escrow account in the context of mortgage payments, which focuses on the management of property-related expenses.