What is an escrow account and how does it work?

When you make an offer, your earnest money deposit goes into an escrow account held by a neutral third party, often the title company. It shows the seller you are serious and stays safe there until closing.

At closing, the escrow holder applies the deposit to your purchase or returns it according to the contract and the laws that govern deposits.

Many lenders create a separate escrow account as part of your monthly mortgage payment. A portion of each payment is set aside to pay your property taxes and homeowners insurance when they come due.

This spreads large annual bills across the year so you do not face a huge lump sum on your own.

Escrow protects both sides of a deal. The buyer's money is not released until the conditions are met, and the seller knows the buyer is serious because the deposit is in a secure account.

For taxes and insurance, escrow makes sure those bills are paid on time, which protects your home and your lender's interest.

Your escrow payment for taxes and insurance can change if those costs rise, which can adjust your monthly payment. Your lender sends an annual review explaining any change.

It is worth understanding what your escrow covers and how the amount is calculated so your monthly budget is accurate.

I explain how escrow works for your specific purchase, including how your earnest money is protected and what your monthly escrow covers.

Knowing how the money flows ahead of time keeps closing calm and your budget clear.