What Is an Escrow Account?

In some mortgages, an escrow account is set up by the lender to pay certain property-related expenses and bills. The escrow account is funded by a portion of the borrower's monthly mortgage payment. The account is also used to pay fees and other costs.

An escrow account is typically kept by a third party. In the initial stage of a mortgage, an escrow account is utilized by the borrower and lender, which each submit funds to the escrow account's temporary custody. This process is used to ensure that the parties fulfill the contract and terms of the mortgage.

Escrow accounts are used to address a common issue for transactions such as mortgages: mutual distrust.

Having a third party manage an escrow account can help mitigate distrust and provide guarantees to everyone involved. Even the most straightforward deals involve numerous details. This is especially true when buying and selling real estate. Real estate transactions regularly require escrow as a third-party "referee" to help buyers and sellers solve problems that arise in the process before the transaction is completed.

Escrow accounts are meant to keep the transaction fair and transparent. Strictly speaking, an escrow account is neither pro borrower nor pro lender – the escrow account is neutral, managed by an impartial third party.

Tellus TIP:

Escrow accounts are not always required by law for mortgage loans, but they can be beneficial when managing property expenses.