What is Escrow?
At the tail end of your homebuying journey, you will encounter escrow services. It can be a helpful tool for managing finances and payments from homebuying to homeownership. Follow along below to learn how escrow works.
What is escrow used for?
An escrow account holds money for your property taxes and homeowners insurance, which are then paid by the mortgage company when they are due. A portion of your monthly mortgage payment will fund the escrow account.
Some lenders require a mortgage escrow account, while some let homeowners pay their insurance and taxes directly. Always check with your lender to see what's covered in your monthly mortgage payment.
Homeowner tip
An escrow account can be especially beneficial for first-time homebuyers and buyers without significant savings. It allows you to set aside a small amount each month for expenses instead of dealing with a large, semi-annual, or annual out-of-pocket expense.
Two types of escrow accounts
One is used during the homebuying process to secure your good-faith deposit (aka earnest money), showing you’re serious about buying the home. The other is used throughout the life of the mortgage loan for payment of taxes and insurance premiums.
Escrow for homebuyers
- A third-party account, which protects both the buyer and the seller through contract processes
- An account that holds the good-faith deposit until the transaction closes to ensure fairness
- A good-faith deposit, which gets applied to the down payment or closing costs if the sale goes through
Escrow for taxes and insurance
- Established by the lender after closing
- Takes a portion of your monthly mortgage payment to pay for taxes and insurance
- Managed by the mortgage lender or servicer
- Analyzed annually to ensure you’re not paying too much or too little. This analysis could cause an adjustment in your total monthly payment.
Who manages the escrow account?
During homebuying, the good-faith deposit or “earnest money” deposit is typically held by either a licensed real estate agent or title company. There may also be an escrow account created with funds at your closing that will be used to pay for third-party services to help ensure you loan is closed and recorded properly.
The escrow for taxes and insurance, if you established one at closing, will be held by your loan servicer, which may also be your lender or another company that is identified as your servicer.
How much does escrow cost?
Typically, escrow fees associated with the loan closing and recording will end up costing 1% to 2% of your home’s total price. Those fees may be paid for by the buyer, the seller, or both. In most cases, both parties will split the escrow management fees evenly.
There typically is no escrow fee associated with the account created to pay your taxes and insurance.
More to explore
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What Do I Need to Know When Getting a Home Inspection?
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What Do I Need to Know When Closing on a Home?
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