Escrow

Escrow serves two distinct functions in real estate. During a purchase, an escrow company or attorney acts as a neutral third party, holding the buyer's earnest money deposit and managing the transfer of funds and documents at closing. After purchase, an escrow account holds monthly portions of your property tax and insurance payments.

During a home purchase, the escrow process works like this: the buyer deposits earnest money into escrow (showing good faith). During the escrow period, inspections, appraisals, and title searches occur. At closing, the escrow company distributes funds — the seller receives the purchase price, the lender receives any loan payoff, and various parties receive their fees.

The ongoing escrow account (impound account) is where a portion of each monthly mortgage payment is held for property taxes and homeowner's insurance. If your annual property tax is $6,000 and insurance is $1,800, your lender collects $650/month ($7,800/12) in addition to your principal and interest payment. The lender then pays these bills when due.

Lenders require escrow accounts to protect their collateral — they want assurance that property taxes are paid (unpaid taxes create liens ahead of the mortgage) and insurance is maintained (protecting the property value). Some lenders allow escrow waiver for borrowers with LTV below 80%, though a fee may apply.

Escrow accounts are required to be analyzed annually. If the account has a shortage (taxes or insurance increased), your payment goes up. If there's a surplus, you receive a refund. Understanding your escrow statement helps you anticipate mortgage payment changes.