An escrow account is managed by a neutral third party (the escrow agent) who holds money or documents until both buyer and seller fulfill their obligations.
Escrow in Real Estate
During a home purchase, the buyer's deposit goes into escrow until closing. After closing, lenders often maintain an escrow account to collect monthly property tax and insurance premiums alongside your mortgage payment.
What's Included
- Property taxes (paid annually or semi-annually)
- Homeowner's insurance premiums
- Private Mortgage Insurance (PMI) if applicable
Escrow Shortages and Surpluses
Lenders review your escrow account annually. If property taxes or insurance premiums rose more than projected, you'll owe a shortage — either as a lump sum or spread across the next year's payments, temporarily raising your monthly amount. If the account overcollected, you'll receive a refund check.
Can You Avoid Escrow?
Some lenders allow borrowers with strong credit and at least 20% equity to waive escrow and pay taxes/insurance directly — often for a small rate premium. This shifts the responsibility (and the risk of a missed payment) entirely onto the homeowner.