Escrow
A neutral third party that holds money or documents until everyone meets their end of the deal. In real estate, escrow also refers to the account your lender uses to collect and pay your property taxes and insurance.
Escrow plays two roles in real estate, and both boil down to the same idea: someone trustworthy holds onto the money until conditions are met.
During a home purchase, an escrow company or attorney sits in the middle of the transaction. You deposit your earnest money (your good-faith deposit) into escrow. While inspections, appraisals, and title searches happen, that money stays safely held. At closing, the escrow company distributes everything—the seller gets paid, any existing loans get paid off, and fees go to the right parties.
After you close, there's a second kind of escrow: the ongoing account (sometimes called an impound account) built into your monthly mortgage payment. If your annual property tax is $6,000 and insurance is $1,800, your lender collects an extra $650 per month ($7,800 divided by 12) on top of your principal and interest. They park that money in escrow and pay those bills when they come due.
Why do lenders insist on this? They're protecting their investment. Unpaid property taxes create liens that jump ahead of the mortgage, and lapsed insurance leaves the property unprotected. Some lenders will waive escrow if you have at least 20% equity, though they may charge a small fee for it.
Your lender reviews your escrow account once a year. If taxes or insurance went up, your monthly payment increases to cover the gap. If there's a surplus, you get a refund. Keeping an eye on your annual escrow statement helps you avoid payment surprises.
Frequently Asked Questions
▸Why did my mortgage payment change because of escrow?
Your escrow amount adjusts annually based on actual property tax and insurance bills. If either increases (property reassessment, insurance rate hike), your escrow payment increases too, raising your total monthly payment. The principal and interest portion remains the same on a fixed-rate mortgage.
▸Can I manage my own escrow (pay taxes and insurance directly)?
Some lenders allow escrow waiver, usually for borrowers with 20%+ equity. You'd pay taxes and insurance directly, lowering your monthly mortgage payment. However, you must be disciplined about setting aside funds — missing a tax or insurance payment can have serious consequences.
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