Escrow

What is escrow?

Escrow means a neutral third party holds money or documents until agreed conditions are met, and in real estate the word covers two distinct things. Transaction escrow: during a purchase, an escrow or title company holds the buyer’s earnest money deposit, collects loan funds and documents, and releases everything simultaneously at closing, so neither side must trust the other to perform first. Servicing escrow: after closing, a portion of each monthly mortgage payment accumulates in an escrow (impound) account from which the loan servicer pays property taxes and insurance when due.

In a purchase, escrow is what makes the earnest money deposit safe: the deposit sits with the neutral company, not the seller, and its release is governed by the contract’s contingencies. If the deal dies within a contingency (inspection, financing, appraisal), the deposit returns to the buyer; if the buyer defaults outside them, the seller may claim it.

Servicing escrow accounts are required on most loans above 80% LTV and analyzed annually: when taxes or insurance premiums rise, the monthly payment rises to refill the account, the usual reason a "fixed" mortgage payment increases. Investors juggling multiple properties often appreciate escrow’s autopilot, while some prefer waiving it (typically allowed below 80% LTV, sometimes for a small fee) to control the cash themselves.

Worked example

You contract to buy a rental for $250,000 with a $5,000 earnest deposit held in escrow. After inspection and appraisal clear, the escrow company receives your $62,500 down payment and the lender’s $187,500, pays off the seller’s mortgage, records the deed, and disburses the balance to the seller, all in one coordinated closing. Going forward, $460 of each mortgage payment lands in your escrow account to cover taxes and insurance.

Frequently asked questions

Why did my mortgage payment go up if I have a fixed-rate loan?

Almost certainly your escrow account. The principal-and-interest portion of a fixed loan never changes, but property taxes and insurance premiums do, and your servicer’s annual escrow analysis adjusts the monthly collection to cover them, sometimes adding a shortage payment for months already underfunded. Rising insurance premiums have driven especially sharp escrow increases in storm-exposed states in recent years.

When can I lose my earnest money deposit in escrow?

When you back out of the purchase for a reason not protected by a contingency in your contract. Exit during your inspection, financing, or appraisal contingency windows and the deposit returns to you; waive those contingencies or blow past their deadlines and then walk, and the seller can claim the deposit as damages. The lesson: treat contingency deadlines as real, and never waive protections you might actually need.

Related tools and guides

• Mortgage Calculator