What is the purpose of an escrow account in real estate?

The purpose of an escrow account in real estate is to hold funds for property taxes and insurance. This type of account acts as a financial management tool that ensures necessary expenses associated with property ownership are paid on time. By collecting a portion of the homeowner's monthly mortgage payment, lenders can accumulate enough money in the escrow account to cover property taxes and homeowners insurance when they come due. This process alleviates the burden on the homeowner, preventing situations where they might forget to pay these essential expenses, which could lead to penalties, liens, or lapses in coverage.

In essence, the escrow account provides a safeguard for both the lender and the homeowner, ensuring that these critical payments are made and the property remains protected from tax issues or uninsured hazards.