What does "escrow" mean in mortgage lending?

In mortgage lending, "escrow" refers to a system used to manage property taxes and insurance payments. When a borrower takes out a mortgage, the lender often collects monthly payments that include not only principal and interest but also amounts for property taxes and homeowners insurance. These funds are placed into an escrow account and held by the lender. This arrangement ensures that, when property tax bills or insurance premiums are due, the lender can pay them on behalf of the borrower from the escrow account.

This system simplifies the payment process for borrowers, as they do not need to set aside large sums of money for tax and insurance payments all at once. Instead, they pay smaller amounts regularly, making budgeting more manageable. Additionally, it protects the lender's interests by ensuring that these crucial expenses are paid on time, thereby reducing the risk of tax liens or lapses in insurance coverage.

The other options, while related to the mortgage process, do not accurately define escrow. A temporary holding account for cash during transaction closure may describe certain aspects of escrow but does not encompass its primary role in managing ongoing expenses like property taxes and insurance. A type of loan modification plan refers to alterations in the terms of a loan to assist the borrower but is not related to the escrow function. Evalu