Escrow
A neutral holding account that protects everyone in a real estate transaction.
What Is Escrow?
Escrow is a financial arrangement where a neutral third party (the escrow agent) holds funds, documents, or assets on behalf of two parties in a transaction until all agreed-upon conditions are met.
In real estate, escrow appears in two distinct contexts:
- Closing escrow — during the home purchase process, funds and documents are held until all conditions (inspection, appraisal, title search) are satisfied.
- Ongoing mortgage escrow account — after purchase, a portion of each monthly mortgage payment is set aside to pay property taxes and homeowner's insurance when they come due.
How Mortgage Escrow Accounts Work
Most lenders require an escrow account, especially when your down payment is less than 20%. Each month, your mortgage payment is split into four parts — often called PITI:
The T and I portions go into your escrow account. When your property tax bill or insurance premium is due, the lender pays it directly from your escrow account — so you never face a large lump-sum payment.
Real Example: Monthly PITI Breakdown
$400,000 home, 6.5% rate, 30-year mortgage, 20% down ($80,000):
| Principal + Interest (P&I) | $2,023 |
| Property taxes (est. 1.2% of home value/yr) | $400 |
| Homeowner's insurance (est.) | $120 |
| PMI (not required with 20% down) | $0 |
| Total Monthly Payment (PITI) | $2,543 |
Of this, $520/month goes into escrow. At year end, the lender pays your $4,800 property tax bill and $1,440 insurance premium from those funds.
Escrow Analysis and Adjustments
Lenders perform an annual escrow analysis to ensure you're contributing enough. If property taxes or insurance premiums increased, your monthly payment will increase. If they decreased or you overpaid, you may receive an escrow refund.
Lenders are allowed to hold a cushion of up to 2 months of projected escrow payments (required by federal RESPA rules).
Calculate It Yourself
Calculate your full PITI payment including escrow for taxes and insurance.