What does the term "escrow" mean in the context of mortgage loans?

In the context of mortgage loans, the term "escrow" refers to a financial arrangement in which a neutral third party holds funds or documents on behalf of two other parties involved in a transaction. This system is commonly used in real estate transactions to ensure that the buyer and seller meet their contractual obligations before the funds and the property exchange hands. For example, in a home purchase, the buyer might deposit the earnest money into an escrow account managed by a title company or an escrow agent.

The purpose of escrow is to provide security for both parties; it assures the seller that the buyer has the necessary funds for the transaction, while simultaneously protecting the buyer by ensuring that the seller fulfills all agreed-upon terms, such as making necessary repairs or providing clear property titles. Once all the conditions are met, the escrow agent will release the funds to the seller and the documents—like the deed—to the buyer, completing the transaction.

Other options, while related to the financial and real estate processes, do not accurately capture the meaning of "escrow." Loan processing fees represent upfront costs for processing a mortgage; mortgage insurance protects lenders against borrower defaults; and governmental assessments relate to property valuation for taxation purposes. These definitions point to important concepts in real estate transactions but