What is an escrow account?

An escrow account serves a specific purpose in the mortgage process by holding funds that are designated for paying property taxes and insurance premiums on behalf of the borrower. When a borrower makes their monthly mortgage payment, a portion is often allocated to this account. This ensures that the lender can manage these payments effectively and that the borrower remains current on property taxes and insurance, which are essential for maintaining ownership and avoiding penalties.

By using an escrow account, the lender assumes responsibility for making these payments when they are due, reducing the risk of lapses that could affect the borrower's property ownership. This process also helps borrowers budget for these significant expenses, as they can spread these costs over the year instead of facing large, lump-sum payments.

In contrast, down payment funds are typically held in different accounts; rental income pertains to investment properties, and investment accounts serve different financial goals entirely. Therefore, option B accurately describes the function and importance of an escrow account in real estate transactions.