Is an escrow account required?

Many lenders require one, and it is generally required for FHA loans and for conventional loans with small down payments. Some lenders let borrowers with more equity waive it.

Why did my escrow payment go up?

Usually because property taxes or insurance premiums rose. The servicer adjusts your payment at the annual review to cover the higher bills.

What does 'closing escrow' mean?

It means the conditions are met, funds and documents are exchanged, and the sale is complete and recorded.

Buying & closing

Escrow

Also called escrow account, impound account

In short

Escrow is an arrangement where a neutral third party holds money or documents until the conditions of a deal are met. The term also refers to the account a lender uses to pay a borrower's property taxes and insurance.

Two meanings

Closing escrow, escrow account

Held by

Escrow, title co. or lender

Funded by

Deposits and monthly payments

Reviewed

At least yearly by servicer

Escrow during a purchase

When you're under contract, an escrow or title company holds your earnest money, collects loan funds and documents, and pays everyone at closing. "In escrow" means the deal is pending while contingencies are worked through.

Escrow accounts after closing

Most lenders collect a share of your yearly property taxes and homeowners insurance with each monthly payment, the "T" and "I" in PITI. The servicer pays those bills from the account and reviews it yearly. If taxes or premiums rise, your payment goes up to cover a shortage.

Why it matters for buyers of distressed homes

Unpaid property taxes are a common cause of tax liens and foreclosure. An escrow account reduces that risk for owners. Investors buying with cash or hard money usually have no escrow account and must budget taxes and insurance themselves.

Example

Monthly escrow for taxes and insurance

A home has $4,800 a year in property taxes and $1,800 a year in insurance, $6,600 total. The servicer collects $550 a month into escrow on top of principal and interest. If the county raises taxes by $600 a year, the next annual review adds $50 a month, plus a catch-up for any shortage.

Escrow vs. Earnest Money

Escrow

Earnest Money

Earnest money is a deposit a buyer puts down when an offer is accepted to show good faith. It is held in escrow and usually credited toward the down payment or closing costs at closing.

The differenceEarnest money is the buyer's deposit; escrow is the neutral arrangement or account that holds it (and later holds tax and insurance funds).

Frequently Asked Questions

Related terms

PITIMortgages & financingPITI stands for principal, interest, taxes and insurance, the four parts of a typical monthly mortgage payment. Lenders use it to judge whether a borrower can afford a home.Closing CostsBuying & closingClosing costs are the fees and prepaid expenses paid to complete a real estate purchase, beyond the price and down payment. Buyers typically pay about 2% to 5% of the loan or purchase price.Title InsuranceBuying & closingTitle insurance protects a buyer or lender against losses from ownership problems that existed before the purchase, such as undisclosed liens, forged documents or recording errors. It is paid once at closing.Tax LienTitle & legalA tax lien is a government's legal claim against a property for unpaid taxes. Property tax liens usually take priority over mortgages and can lead to a tax lien certificate sale or tax deed sale.Title SearchTitle & legalA title search is a review of public records to confirm who legally owns a property and to find any liens, judgments, easements or other claims that could affect ownership.Private Mortgage Insurance (PMI)Mortgages & financingPrivate mortgage insurance (PMI) protects the lender, not the borrower, if a borrower defaults on a conventional loan. It is usually required when the down payment is less than 20% of the home's value.MortgageMortgages & financingA mortgage is a loan used to buy real estate, secured by the property itself. If the borrower stops paying, the lender can take the property through foreclosure to recover what is owed.ContingencyBuying & closingA contingency is a condition in a purchase contract that must be met for the sale to go through. If it isn't met by its deadline, the buyer can usually cancel and keep their earnest money.

Learn more in the knowledge base

Closing Day: What to Expect When You Buy a HomeGuide · 7 min readClosing is where the loan funds, the money changes hands and the home becomes yours. Knowing what to review beforehand, what to bring and what you are signing makes the day shorter and helps you catch problems while they can still be fixed.Closing Costs Explained: What Buyers Pay and WhyGuide · 9 min readClosing costs are the fees and prepaid expenses due when a purchase completes, on top of the down payment. They vary by state, loan and price, and some are negotiable. This guide explains each category, how to read your disclosures and how to keep costs down.Closing and Recording: How a Property Purchase Becomes FinalGuide · 7 min readSigning papers is only part of closing. Money has to change hands safely, the deed has to be recorded in the public records and title insurance policies have to be issued. This guide explains those mechanics, who handles each one, how to protect your funds from wire fraud and which records to keep once the purchase is complete.

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Disclaimer: The information on this page is for general educational purposes only and is not legal, financial, tax or investment advice. Laws, lending rules and market conditions vary by state and change over time, and any figures shown are estimates. Before you buy, sell, finance or bid on a property, consult a qualified attorney, financial advisor, lender or licensed real estate professional about your situation.