Escrow
Also called escrow account, impound account
An account a neutral party or mortgage servicer holds to pay property taxes and insurance, or to hold funds until a home sale closes.
What it means
In home buying, escrow has two meanings. During a purchase, an escrow or title company holds the earnest money deposit and documents until all conditions are met and the sale closes. After closing, many borrowers have an escrow account managed by their loan servicer.
With an escrow account, the monthly mortgage payment includes one-twelfth of the estimated yearly property tax and homeowners insurance bills, and the servicer pays those bills when due. The servicer reviews the account each year; if taxes or premiums rise, the payment goes up, and a shortage or surplus is settled. Some lenders require escrow, especially with smaller down payments.
Example
For example, if property taxes are $4,800 a year and homeowners insurance is $1,800, the escrow portion is $6,600 ÷ 12, or $550 a month, added to principal and interest.
How it’s used
- Spreading large annual bills into monthly amounts
- Holding funds safely during a home purchase
- Explaining why a fixed-rate payment changed
Good to know
- Review the annual escrow statement; a tax reassessment or insurance increase can raise the payment.
Related terms
Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.