What Is Escrow and How Does It Work

By the Between the News desk · researched with AI tools, checked and edited by a human editor

Purchase escrow: holds earnest money (1-3% of sale price) during a home saleMortgage escrow: collects monthly funds for property tax + insuranceLenders often require escrow if your down payment is under 20%A 20%+ down payment can let you waive an escrow accountSource: CFPB / mortgage lender escrow guides

👁Decoded

Escrow shows up in home buying twice, in two different forms, and confusing the two is one of the most common sources of confusion for first-time buyers.

The first is purchase escrow, which only exists temporarily during the sale itself. A neutral third party — usually a title company or attorney — holds your earnest money deposit, typically 1% to 3% of the sale price, as proof you're serious about the purchase. That money sits untouched until the deal closes or falls through, at which point it goes to whichever party the purchase agreement says it should.

The second is mortgage escrow, which is ongoing and lasts for as long as your lender requires it. Instead of you personally paying property tax and homeowners insurance bills once or twice a year in large lump sums, your lender collects a portion of those costs every month as part of your regular mortgage payment, holds it in an escrow account, and pays the tax and insurance bills on your behalf when they come due.

Lenders review your escrow account annually and adjust your monthly payment if your actual property tax or insurance costs changed from what was originally estimated — which is why your total mortgage payment can shift slightly year to year even if your loan's interest rate is fixed.

Whether you're required to have a mortgage escrow account often comes down to your down payment. Loans with a down payment below 20% frequently require escrow. Put down 20% or more, and you may be able to waive the account entirely, paying your own taxes and insurance directly instead.

“Your fixed-rate mortgage payment can still change year to year — because the escrow portion covering taxes and insurance gets recalculated annually.”