In mortgage lending, what does the term "escrow account" refer to?

In mortgage lending, the term "escrow account" specifically refers to an account where funds for taxes and insurance are held. This account is typically set up by the lender to collect and manage these essential payments on behalf of the borrower. The lender adds a portion of the borrower's monthly mortgage payment to the escrow account, ensuring that there are sufficient funds available when property taxes and insurance premiums come due. This process helps to prevent the borrower from falling behind on these critical payments, which could lead to potential foreclosure or loss of coverage.

The mechanism of using an escrow account ensures that these obligations are met on time and helps the borrower manage their payments more effectively as they are spread over the year instead of being due all at once.