Final answer:
An escrow account is a fund that a lender may require a borrower to establish in order to cover mortgage default insurance payments that become due on the property during the year.
Step-by-step explanation:
A mortgage is a loan provided by a lender to help individuals finance the purchase of a home. As part of the mortgage agreement, the lender may require the borrower to establish an escrow account. This account is used to hold funds that will be used to pay for mortgage default insurance that becomes due on the property during the year. The purpose of the escrow account is to ensure that the borrower has a sufficient amount of money to cover these insurance payments.
For example, let's say a borrower has a mortgage for a property that requires mortgage default insurance. Each year, the insurance premium is $1,200. Instead of paying this amount directly to the insurance company, the borrower pays a portion of it each month into the escrow account. The lender then uses the funds in the escrow account to pay the insurance premium when it becomes due.
In summary, an escrow account is a fund that a lender may require a borrower to establish in order to cover mortgage default insurance payments that become due on the property during the year.