Escrow
Escrow refers to a neutral third-party arrangement where money or documents are held until specific conditions are met. In real estate, escrow is used twice: during the purchase (holding the earnest money and facilitating the transaction) and throughout the mortgage (an ongoing account where taxes and insurance are held). 'Closing escrow' means the transaction has finalized.
Purchase escrow begins when you sign a purchase agreement and submit earnest money. The escrow company (or attorney in some states) holds documents and funds, coordinates with all parties, ensures all conditions are satisfied, and distributes money when the transaction closes. Escrow timelines typically run 30–45 days for a standard home purchase.
Mortgage escrow (also called impound account) is an ongoing account your lender manages to collect and pay property taxes and homeowners insurance. Each month, a portion of your payment goes into escrow; when tax or insurance bills come due, the lender pays them directly from that account. Lenders require escrow on loans with less than 20% down; borrowers with 20%+ equity can often waive it (sometimes for a small fee). Your direct lender establishes your escrow account at closing and sets the initial deposit amount based on the upcoming tax and insurance schedule.
If your escrow account runs short (due to a tax assessment increase or higher insurance premium), you'll receive an escrow shortage notice. The lender will either ask for a lump-sum catch-up payment or increase your monthly payment. An annual escrow analysis adjusts your payment to stay current.
Key Takeaway
Escrow refers to a neutral third-party arrangement where money or documents are held until specific conditions are met. In real estate, escrow is used twice: during the purchase (holding the earnest money and facilitating the transaction) and throughout the mortgage (an ongoing account where taxes and insurance are held). 'Closing escrow' means the transaction has finalized.
Related Terms
Frequently Asked Questions
It means the buyer and seller have signed a purchase agreement and are working toward closing. The transaction is under contract but hasn't finalized yet.
You can cancel the purchase contract (subject to contingency terms and potential loss of earnest money), but you cannot simply cancel the escrow process once a purchase is in progress.
If your down payment is less than 20%, your lender will almost certainly require it. With 20%+ down, you may have the option to waive escrow and manage tax and insurance payments yourself.
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