Escrow is a financial arrangement where a neutral third party holds and manages funds for two parties. An escrow account is used to hold funds for various purposes such as property taxes, homeowners insurance, and other related. This ensures that the necessary funds are set aside and available when these payments become due. Escrow provides a level of security and transparency for both sellers, as it helps to ensure that all financial obligations are met during the mortgage process.

How Escrow Works

When a buyer obtains a mortgage, the lender sets up an escrow account to pay property taxes and homeowners’ insurance. Each month, along with the loan repayment, the borrower contributes to this account. The escrow service then disburses these funds when they are due. This ensures that important payments are made on time and reduces the risk for both the lender and the borrower.

Escrow accounts also play a crucial role during the closing of a home purchase. They hold the buyer’s earnest money—the deposit made to show commitment—until the deal closes, protecting both the buyer and seller during the transaction. Overall, escrow in mortgage lending provides a layer of security and facilitates a trustworthy transaction process.

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