Simple answers to the 10 most common escrow questions

Confused about escrow? A lot of first-time homebuyers are (if this clip from Portlandia is any indication). But we’re here to tell you that the biggest misconception about escrow might just be that it’s complicated! In fact, the basic idea is very simple, and most homeowners find that an escrow account makes budgeting easier.

So what is escrow?

Broadly speaking, it’s the use of a trusted “middle man” who handles money or other assets being transferred between two parties, making sure that the terms of the deal are met by both sides. It’s used in business all the time to make sure neither side gets cheated. Pretty straightforward, right?

We’ll explain more below, but in the context of homeownership, escrow comes up twice (which might be one reason for the confusion). Those two instances are:

  1. During the process of closing on your home, to hold “earnest money”

  2. Then as a long-term account that you pay property taxes and insurance into each month, as part of your mortgage payment

Here are answers to the 10 escrow questions that seem to come up the most. Remember that although federal law governs certain aspects of escrow, states and banks are allowed to do some things their own way. So if you’re ever uncertain about an escrow issue, it’s a good idea to contact a local homeownership advisor. 

1. What does it mean to be “in escrow”?

When you’re in the process of buying a home, you’re “in escrow” between the time that your offer — with its cash deposit — is accepted and the day that you close and take ownership. That’s usually at least 30 days.

The deposit, often called “earnest money” because it shows that you’re serious, is held “in escrow” — the seller doesn’t get the money until you come to a final agreement on the sale. Then it’s applied to the purchase price.

Depending on where you live, the middle man at this stage might be an individual escrow agent, an attorney, or a title company.

2. What is an escrow account?

Most homeowners have a long-term escrow account, established at closing. The middle man is your loan servicer, and the account is used to collect and hold the portion of your monthly mortgage payment that goes toward property taxes, mortgage insurance, and sometimes homeowners insurance (not all lenders require that homeowners insurance payments be escrowed). When the expenses come due, the servicer pays them for you from the escrow account.

It’s very much like a savings account, but only your loan servicer can make withdrawals.

3. Do I have to set up escrow myself?

No. Not during the sale, and not for the long term at closing. That’s one of the things that a title agent, attorney, or servicer is getting paid to do.

4. How much goes into my escrow account at closing?

As part of the closing costs, lenders often ask buyers to put in two months of estimated property taxes, mortgage insurance payments, and homeowners insurance payments. They like a cushion.

Sometimes you have to pay the entire first year of homeowners insurance up front and immediately start making escrow payments for next year’s bill.

5. Is an escrow account required?

Almost always, because it protects the lender’s investment.

If you were to fall behind on your property taxes, you could end up with a lien on your home — and eventually lose it. As you can imagine, lenders don’t like it when someone else has a claim on your (their) property. And if your homeowners insurance lapsed and your home was seriously damaged, again, the lender’s investment would be in jeopardy.

But an escrow account offers two big pluses for y