Texas Real Estate State Practice Exam

Which type of account holds funds for property expenses like taxes and insurance, and is also known as an impound or reserve account?

1. Escrow Account

2. Trust Account

3. Savings Account

4. Checking Account

The correct answer is: Escrow Account

The correct answer is indeed the escrow account. This type of account is specifically designed to hold funds collected for property-related expenses, including property taxes and insurance premiums. By keeping these funds in an escrow account, a lender or property manager ensures that there is adequate money set aside to cover these periodic expenses, avoiding any potential lapses in coverage or payment. An escrow account also serves the purpose of managing the distribution of funds at the right time, ensuring that payments are made promptly, which helps maintain the property and the financial responsibilities associated with it. The terms "impound" or "reserve account" are synonymous with escrow accounts, reflecting their role in managing reserves for future expenses. In contrast, trust accounts are primarily used to hold client funds managed by real estate professionals, savings accounts are intended for personal savings and earning interest, and checking accounts facilitate everyday transactions without the specific goal of managing property-related expenses. Each of these account types serves distinct purposes that don't align with the criteria outlined in the question.