What is the purpose of an escrow account in mortgage transactions?

• A. To fund down payment
• B. To collect and pay property taxes and insurance
• C. To manage rental income
• D. To cover closing costs

Answer: (B)

An escrow account in a mortgage is used to hold funds specifically for ongoing housing expenses, mainly property taxes and homeowners insurance. With each monthly payment, money goes into the escrow fund, and when tax bills or insurance premiums are due, the lender uses those funds to pay them. This keeps taxes and insurance from slipping and protects the lender’s security by preventing tax liens or uninsured gaps. It also smooths out cash flow for the borrower by spreading large yearly costs into smaller monthly amounts. The other options refer to costs paid at different times (down payment, closing costs) or unrelated income management, so they don’t describe the function of an escrow account.