Buying a Home
What is an escrow account and how does it work?
By Steve Lockhart
The short answer
Escrow in real estate means a neutral third party holds money and documents during the transaction so neither side has to hand everything over on trust.
Full answer
Escrow in real estate means a neutral third party holds money and documents during the transaction so neither side has to hand everything over on trust. In the purchase process, your earnest money deposit is held in escrow, and the title and escrow company coordinates the payoff, the recording, and the transfer of funds at closing. Separately, many lenders set up what is also called an escrow account for your ongoing property taxes and homeowners insurance: a portion of your monthly payment is set aside there, and the lender pays those bills for you when they come due. That second kind is built into your monthly housing cost, which is why the mortgage payment includes more than just principal and interest. Understanding which escrow you are talking about makes the whole process feel far less mysterious.
Go a little deeper
Frequently asked
Questions buyers often follow up on
Is my earnest money safe while it is held in escrow?
Held by the escrow or title company, the deposit sits in a neutral account, not with the seller, and it is only paid out per the contract at the path after closing or by a written agreement. That is the entire point of escrow: neither side has to trust the other with cash. Confirm the escrow company in your contract and keep your receipts.
Will I still pay my property taxes separately if I have an escrow account?
You will not pay separately, the lender will handle it. A portion of each monthly payment is set aside, and the lender pays your property taxes and homeowners insurance when they come due. Without escrow you pay those bills yourself on their own schedule. The tax belongs to you either way; escrow simply smooths a large bill into monthly pieces.
What happens to leftover escrow funds after closing?
At closing the transaction escrow pays everyone it owes, applies your deposit toward the purchase, and returns any surplus per the contract. The ongoing escrow account at the lender is reviewed each year, and overages are returned or shortages collected. Every number appears, itemized, on your closing statement, and I will show you how to read it.
The Lockhart Method
The Lockhart Method
Your Home | My Strategy | Proven Results
My strategy: keep the two escrows clear in your mind, the one protecting the purchase and the one protecting your future bills. When the names separate, the whole process does.
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