What does "escrow" refer to in mortgage lending?

Escrow in mortgage lending refers to an account that is managed by a third party to hold funds for specific purposes, generally related to the financing and servicing of a mortgage. This typically includes collecting a portion of the borrower's monthly mortgage payment to cover property taxes, homeowners insurance, and sometimes mortgage insurance. These funds remain in the escrow account until they are needed to pay the relevant expenses, ensuring that they are paid on time and alleviating the responsibility from the borrower to manage these payments separately.

This practice helps protect both the lender and the borrower by ensuring necessary payments are made without requiring the borrower to remember to pay these amounts directly. By using an escrow account, it can also provide a more streamlined approach to managing homeownership expenses, making it a standard part of many mortgage agreements.