What does the term "escrow" refer to in relation to mortgages?

The term "escrow" in relation to mortgages refers to funds held by a third party until certain conditions of a contract are met. In a mortgage context, escrow is commonly used to manage the funds required for property taxes, homeowners insurance, and other related expenses. When a borrower pays their mortgage, part of that payment may include amounts set aside into an escrow account. This ensures that when property taxes or insurance premiums are due, the necessary funds are readily available to cover these obligations. The use of escrow provides security to both lenders and borrowers, as it helps ensure that essential payments related to the property are made on time and can prevent potential issues such as foreclosure due to unpaid taxes or insurance lapses.

In contrast, a legal document providing loan terms is different as it pertains to the mortgage agreement itself, while the process of transferring ownership of property refers to closing procedures. A type of variable rate mortgage involves interest rates that can change, but does not encompass the idea of holding funds in trust for specific purposes, which is central to the definition of escrow.