What Is Escrow and How Does It Work When You Buy a Home?

Escrow means a neutral third party holds money or papers until a deal's terms are met. When you buy a home, it shows up twice. First, an escrow or title company holds your deposit and runs the closing. Second, after you close, your lender may run an escrow account that collects part of each mortgage payment to pay your property taxes and homeowners insurance.

What is escrow during a home purchase?

When your offer is accepted, the deal "goes into escrow" or "goes under contract." A neutral party now holds things neither side should control alone:

• Your earnest money deposit. It stays put until closing or until the contract says who gets it. See what earnest money is.
• The documents. The deed, loan papers and payoff letters.
• The money at closing. Your down payment, your loan and the seller's payoff all pass through this account.

Who does this job depends on where you buy. In some states it is an escrow company. In others it is a title company or a closing attorney. In states like Georgia, North Carolina and South Carolina, an attorney runs the closing. Your agent will know who handles it locally.

How does closing escrow work, step by step?

1. You deposit earnest money. Usually within a few days of the accepted offer.
2. The escrow or title company opens a file. It orders the title search and asks the seller's lender for a payoff.
3. Conditions get met. Inspection, appraisal and loan approval, each by its deadline.
4. You get your Closing Disclosure. It lists every cost. Your lender must give it to you at least three business days before closing.
5. You send the rest of your money. By wire or cashier's check, as the closer tells you.
6. Everyone signs, and money moves. The seller is paid, old loans are paid off and the deed is recorded.

Scammers target this step. Never trust wiring instructions from an email alone. Call the closer at a number you know is real before you send money. Learn more about closing costs and how long buying takes.

What is a mortgage escrow account?

After you close, escrow means something else. The CFPB describes it as an account your lender sets up to pay certain property costs, mostly your property taxes and homeowners insurance. Part of each monthly mortgage payment goes into it. When the tax bill or insurance bill is due, your servicer pays it from the account.

This spreads big yearly bills into monthly pieces. Some places call it an impound account.

Do you have to have an escrow account?

Often, yes. The CFPB says many lenders require it, and sometimes the law does. If you don't have one, you have to save and pay those bills on your own. Miss a tax bill and you can face penalties or a tax lien. Let your insurance lapse and your lender can buy coverage for you and bill you. The CFPB says that coverage usually costs more and mostly protects the lender.

Why does your payment change when your loan didn't?

Because your taxes and insurance changed. Your servicer reviews the escrow account each year and adjusts your payment to match the new bills. Federal rules, in Regulation X at 12 CFR 1024.17, set how it works:

• Cushion: your servicer may keep a cushion of up to one-sixth of the year's escrow bills, about two months' worth.
• Yearly statement: you get an annual escrow statement within 30 days of the end of the escrow year.
• Surplus: if there is a surplus of $50 or more and you are current, the servicer must refund it within 30 days. Under $50, it can refund it or credit it to next year.
• Shortage: if the account comes up short, the servicer can let it stand or ask you to repay it. If the shortage is one month's escrow payment or more, it can only be spread over at least 12 months, not demanded at once.

How do you keep escrow from surprising you?

• Ask what the current property taxes are before you buy. In some states, taxes can be reset after a sale.
• Ask whether you qualify for a homestead exemption, and apply on time. See the first-time buyer checklist.
• Shop your homeowners insurance each year.
• Read your annual escrow statement when it comes.

Planning a budget? Taxes and insurance are part of your monthly cost. Run them in the affordability calculator or mortgage calculator, then get pre-approved with a licensed loan officer.

Quick answers

What does it mean when a house is in escrow?

The seller accepted an offer, and a neutral party is holding the deposit and papers while the buyer and seller finish the steps in the contract before closing.

Who holds escrow money?

A neutral party: an escrow company, title company, closing attorney or a broker's trust account, depending on your state. It is never handed straight to the seller.

What does a mortgage escrow account pay?

Mostly property taxes and homeowners insurance. Part of your monthly mortgage payment goes in, and your servicer pays those bills when they are due.

Why did my escrow payment go up?

Usually because your property taxes or insurance went up. Your servicer reviews the account every year and changes your payment to cover the new bills.

Do I get money back from escrow?

Sometimes. If the yearly review shows a surplus of $50 or more and you are current, your servicer must refund it within 30 days.

Get pre-approved · Understand closing costs · Talk to a local agent

Sources and further reading

Updated November 14, 2026. We check these sources each time we update this guide. See our editorial policy.

1. CFPB: What is an escrow or impound account?
2. CFPB: Regulation X, 12 CFR 1024.17 Escrow accounts
3. CFPB: Closing on your new home