What is Escrow?

Buyer and Lender Signing Document


Summary: As a homeowner you may see an escrow amount on your itemized monthly mortgage payments. Escrow is a legal agreement made and agreed to by both the buyer and lender to have a third party temporarily hold onto substantial amounts of money until specific conditions (like paying off your mortgage) are met. Escrow has two primary purposes: (1) to hold and reimburse money between the buyer and lender and (2) to put money aside to pay taxes and insurance.

Escrow is a legal agreement made and agreed to by both the buyer and lender to have a third party temporarily hold onto substantial amounts of money until specific conditions (like paying off your mortgage) are met. The purpose of an escrow account is to protect both the buyer and lender by making sure funds are paid out to the right individuals.

There are two main purposes to an escrow account:

  1. To hold and reimburse money between a buyer and seller.
  2. To put money aside to pay for taxes and insurance.

Once you buy a house and get a mortgage, you may see an escrow amount on your itemized monthly mortgage payments. This type of escrow account sets aside a homeowner’s money. The money is saved and used to pay for the homeowner’s yearly taxes and home insurance.

The escrow amount can vary year-to-year depending on the city and county the homeowner lives in and the amount spent on insurance and taxes. If there is money left over in the escrow account at the end of the year, homeowners will be issued an escrow refund. If homeowners face a shortage in their escrow account, they will have two options:

  1. Pay the shortage amount in one payment.
  2. Increase monthly escrow amount to supplement the shortage.

A shortage means the homeowner did not have enough money set aside for escrow and the third party had to dip into their funds to pay for the homeowner’s taxes and insurance. A shortage in escrow can be rooted in taxes increasing to rates the third party did not anticipate them to be.

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