What gives assurance that property taxes and home insurance are paid on time?

An escrow account is a financial arrangement where funds are held by a third party on behalf of two other parties involved in a transaction. In the context of homeownership, an escrow account is typically set up by the mortgage lender to ensure that property taxes and home insurance premiums are paid on time.

When homeowners make their monthly mortgage payment, a portion of that payment is allocated to the escrow account. This account accumulates funds until the due dates for property taxes and insurance premiums arrive. The lender then uses the funds from the escrow account to pay these bills directly on behalf of the homeowner. This system provides assurance that these essential payments are made on time, protecting both the borrower and the lender from potential issues such as tax liens or gaps in insurance coverage.

In contrast, the other options involve different processes or responsibilities. Self-assessment requires the homeowner to evaluate their own financial situation, which does not directly ensure timely payments. Financial counseling may provide guidance on managing finances but does not guarantee that payments will be made on time. Direct payments refer to payments made directly by the homeowner but lack the security and assurance that an escrow account provides for automatic and timely disbursement of taxes and insurance payments.