An escrow account is a special account managed by a third party (usually the lending institution) during the real estate transaction process or the ownership period. The primary function of this account is to hold and disburse funds related to the property.
Each month, a portion of your mortgage payment is deposited into the escrow account. The lending institution then withdraws funds from this account to pay for property taxes and insurance premiums, ensuring these payments are made on time and avoiding late fees or penalties.
This setup ensures that property taxes and insurance premiums are paid on time, avoiding legal and financial risks associated with unpaid taxes or lapsed insurance coverage.