Mortgage 101: What is Escrow?

You may not be familiar with the word escrow now, but once you begin the buying process it’s a term you will hear frequently. Escrow is used by mortgage companies to pay property taxes and insurance and is also used from contract to closing. Basically, escrow is what happens when money is deposited by one person with a neutral third party so it can be given to another party upon completion of an event.

In the home buying process, after you find the right home and sign a purchase agreement, you will typically be asked to provide an earnest money deposit to go towards the transaction. The deposit will go into an escrow account, and no funds will be dispersed until all terms in the purchase agreement are satisfied. Escrow protects all parties involved. The escrow account will be “closed” after all of the conditions have been met.

Another escrow account is usually created after you’ve closed on your home. This account is used to make payments on your behalf for real estate taxes and homeowners insurance. Escrow funds are collected as part of your monthly mortgage payment. The advantage of using an escrow account is that it ensures these bills are paid on time and in full, without you having to budget for them separately.