In mortgage lending, what does the term "escrow" mean?

The term "escrow" in mortgage lending refers to a financial arrangement where a third party holds funds on behalf of two parties involved in a transaction, ensuring that all conditions of the agreement are met before the funds are released. This is commonly used in real estate transactions to protect both the buyer and the seller.

In the context of a mortgage, escrow accounts are often set up to collect and hold funds for property taxes and homeowners insurance premiums. This ensures that the homeowner does not have to make large payments when these bills come due, since a portion of their monthly mortgage payment goes into the escrow account throughout the year.

Using an escrow arrangement mitigates risk for both parties involved in the transaction, providing security that certain obligations will be fulfilled before any funds are disbursed. This is particularly vital in real estate, where there are significant financial stakes and various contractual obligations to ensure that all parties meet their responsibilities.