Escrow
In real estate, an escrow account is a third-party account that holds funds — such as property taxes and homeowners insurance — on behalf of a homeowner. Lenders use escrow to ensure these bills are paid on time, as non-payment could threaten the collateral.
Monthly property tax of $350 + insurance of $120 = $470/month added to mortgage payment and held in escrow.
When you have a mortgage, your lender typically requires an escrow account to collect monthly installments for property taxes and homeowners insurance. Each month, a portion of your payment goes into escrow. When tax and insurance bills come due, the servicer pays them from this account.
At closing, you fund an initial escrow deposit — usually 2–3 months' worth of taxes and insurance — to ensure the account has a buffer. Your lender performs an annual escrow analysis to adjust your escrow payment if taxes or insurance costs change.
Escrow is also used during the homebuying process: after a purchase offer is accepted, the buyer's earnest money deposit goes into an escrow account until closing, protecting both parties.
Put this into practice with our free calculator:
Open calculator →Related terms
- Closing Costs
- Closing costs are fees paid at the end of a real estate transaction to complete the mortgage. They typically range from 2–5% of the loan amount and include lender fees, title insurance, appraisal, and prepaid items.
- Mortgage Payment
- A mortgage payment is the fixed monthly amount owed to a lender, covering principal and interest (P&I). It may also include escrow for property tax and homeowners insurance (PITI).
- Home Equity
- Home equity is the portion of your home's value that you actually own — the market value minus any outstanding mortgage balance. Equity grows as you pay down principal and as the home appreciates.