What is mortgage escrow?

Mortgage escrow is a process where a third party, called an escrow agent, holds and disburses funds for the lender and borrower during a real estate transaction. The escrow agent acts as a neutral party and ensures that all of the terms of the sale, such as inspections and title searches, are completed before disbursing the funds.

When a borrower has an escrow account, they pay a portion of their monthly mortgage payment into the escrow account. The lender uses these funds to pay property taxes, insurance and any other required payments on behalf of the borrower. For example, if the property taxes are due every 6 months, the lender will use the funds from the escrow account to pay the taxes when they are due.

The advantage of having an escrow account is that it can make budgeting for property-related expenses, such as taxes and insurance, easier for the borrower. It also ensures that these expenses are paid on time and can help avoid penalties and/or late fees.

It's important to note that some lenders may require an escrow account, while others may allow the borrower to choose. Additionally, some lenders may charge a fee for the service of escrow account and it's important to consider this when comparing loans.