What Is Escrow in Real Estate?
In plain English
Escrow in real estate refers to two related concepts: the closing escrow, where a neutral third party holds funds and documents until a sale completes, and the mortgage escrow account, where lenders collect monthly contributions to cover property taxes and homeowners insurance on the borrower's behalf. Both protect all parties in the transaction.
How Does the Closing Escrow Process Work?
When a purchase contract is signed, the buyer's earnest money deposit goes into escrow. The escrow company or attorney holds all funds and documents — the deed, loan proceeds, and purchase price — until every condition is satisfied, including inspections, title clearance, and loan approval. At closing, the escrow agent disburses funds to the seller and records the deed.
What Is a Mortgage Escrow Account?
Most lenders require an escrow account for property taxes and homeowners insurance. Each month, a portion of your payment goes into this account. When tax bills or insurance premiums come due, the lender pays them directly. This protects the lender from tax liens and uninsured losses while ensuring homeowners don't face large lump-sum bills.
Can You Opt Out of a Mortgage Escrow Account?
Some lenders allow borrowers with 20% or more equity to waive escrow, taking responsibility for paying taxes and insurance directly. Lenders may charge a small fee for this privilege. If you waive escrow, you must be disciplined about setting aside funds each month so you're not caught short when annual bills arrive.
Frequently asked questions
What happens to my escrow account when I sell my home?
When you sell, your lender closes the escrow account and refunds the balance to you, typically within 30 days after the loan is paid off. Any outstanding tax or insurance payments are handled at closing.
Why does my escrow payment change each year?
Lenders review escrow accounts annually. If property taxes or insurance premiums increased, your monthly escrow payment adjusts to cover the higher costs. A shortage means your payment rises; a surplus means you get a refund or reduced payments.
Keep exploring
Related terms
Mortgage
A mortgage is a loan used to purchase real estate, where the property itself serves as collateral. It's typically repaid over 15 or 30 years through monthly payments of principal and interest.
Closing Costs
Closing costs are the fees and expenses paid at the end of a real estate transaction, on top of the down payment. They typically range from 2% to 5% of the loan amount.
Title Insurance
Title insurance protects buyers and lenders against ownership disputes, liens, or defects in a property's title history. It's a one-time premium paid at closing that covers issues from before you owned the home.
Home Appraisal
A home appraisal is an independent estimate of a property's market value, conducted by a licensed appraiser. Lenders require appraisals to ensure the loan amount doesn't exceed what the home is actually worth.
Property Deed
A property deed is the legal document that transfers ownership of real estate from one party to another. Recording the deed with the local government creates the official public record of ownership.