What is an escrow account?

An escrow account is a financial arrangement that involves a third party holding funds until certain conditions are met, typically the completion of a transaction. This process is commonly used in real estate transactions where the buyer's earnest money or other funds are held by an escrow agent until all contractual obligations are fulfilled, such as inspections, financing, and final closing.

This arrangement provides security to both the buyer and seller. It ensures that the funds will be released only when both parties have complied with the terms set out in the agreement. The use of an escrow account helps facilitate smooth transactions and protects the interests of all parties involved.

Other options do not represent the function of an escrow account correctly. For example, while storing real estate documents is an important part of real estate transactions, it does not capture the essence of what an escrow account does. Similarly, mortgage insurance has a distinct purpose relating to protecting lenders against defaults and does not involve the holding of funds in the context of a transaction. Lastly, although escrow accounts can sometimes be used to collect funds for property tax payments, this is not their primary function, which is primarily focused on managing transaction funds until the deal closes.