What Is Escrow on a Home Loan?

If you’re taking out a home loan , you’ll likely come across the term “escrow.” But what is escrow on a home loan? In short, it’s money that’s held in reserve by a third party to pay for things like property taxes and homeowners insurance.

In this blog post, we’ll dive deeper into what escrow is and how it works to help make your home-buying experience a little smoother.

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An escrow, or impound, account is an account that your mortgage lender sets up to pay certain property-related bills on your behalf. The most common bills paid from an escrow account are property taxes and homeowners insurance premiums, but depending on your loan program and state law, your lender may also require you to maintain a reserve in your escrow account to cover anticipated increases in taxes or insurance premiums, or pay for flood insurance or private mortgage insurance.

What is Escrow?

An escrow account is a separate bank account that your mortgage lender sets up to pay your property taxes and insurance premiums on your behalf. By setting up an escrow account, you can avoid the hassle of having to remember to pay these bills yourself. Your lender will collect money from you each month along with your mortgage payment and hold it in the escrow account. When your property taxes or insurance premiums are due, the lender will use the money in the escrow account to pay them for you.

What is an Escrow Account?

When you close on a mortgage, you might be required to fund an escrow account. The funds collected in this account are used to pay your property taxes and homeowners insurance premiums on your behalf.

Your lender will typically collect 1/12 of the estimated annual amount needed to pay these bills each month, along with your mortgage payment. When the bills come due, the lender will use the money in your escrow account to pay them.

If there is money left over in your escrow account at the end of the year, you might be entitled to a refund. Alternatively, if not enough money has been collected, you may need to pay into the account to bring it up to date.

How Does an Escrow Account Work?

Your monthly mortgage payment is more than just the principal and interest that go towards repaying your loan. It also includes other items like hazard insurance and property taxes. These are typically paid once or twice a year, but are added into your monthly mortgage payment and held in an escrow account by your lender. When it’s time to pay these bills, your lender will draw from the escrow account and pay them on your behalf.

You may be wondering how much should be in my escrow account? Many factors are considered when setting up an escrow account, but a common rule of thumb is to have two months’ worth of payments in the account at all times. So, if you have a $1,200 mortgage payment that includes $200 for taxes and $100 for insurance, you’d need $1,500 in the account at all times.

If your property taxes or homeowners insurance increase during the year, your lender will adjust your monthly payment to make sure there is enough money in the escrow account to cover the new bill when it’s due. The same is true if these bills decrease — you may see a decrease in your monthly mortgage payment as well.

The Pros and Cons of Escrow

When you buy a home, you typically have to put down a deposit, or down payment, on the home. As the buyer, you may not have all of the money upfront to cover the entire purchase price, so an escrow account is set up as part of your home loan.

The Pros of Escrow

There are several potential benefits to using an escrow service when you are buying or selling a home.

One of the biggest advantages is that it can help to speed up the transaction by taking care of some of the details related to the sale. This can be especially helpful if you are selling your home and also buying a new one, as you can often arrange to have the escrow company handle both transactions at the same time.

Another advantage of using an escrow service is that it can provide peace of mind for both buyers and sellers. For buyers, having an escrow account can help to ensure that they will not have to come up with a large sum of money at closing. And for sellers, having an escrow account can provide assurance that they will get paid when the sale is completed.

In addition, using an escrow service can help to protect both parties in the event that something goes wrong with the transaction. For example, if the buyer fails to make their mortgage payments on time, the escrow company can hold onto the funds until the issue is resolved. This can help to avoid a situation where the seller ends up being responsible for paying back the mortgage.

The Cons of Escrow

While there are some advantages to using escrow, there are also some disadvantages to be aware of. One of the biggest drawbacks is that you’ll have to pay more each month. This is because in addition to your mortgage payment, you’ll also have to pay into escrow. So, your total monthly housing costs will be higher.

Another downside to escrow is that it can take a while for your money to build up in the account. So, if you have a large repair that needs to be made right away, you may have to pay for it out of pocket. This can be frustrating if you were counting on having the money in escrow to cover the cost.

Lastly, if your property taxes go up or your insurance premiums increase, your monthly mortgage payment will also increase. This can be a significant disadvantage if your budget is tight.

How to Choose an Escrow Company

If you’re buying a home, you’ll probably be using escrow. This third-party service is designed to protect both the buyer and the seller. Escrow companies hold onto things like the down payment, loan documents, and other funds until closing. Once everything is finalized, the escrow company releases the funds to the seller. But how do you know which escrow company to choose?

Do Your Research

When you’re ready to buy a home, you’ll choose an escrow company as part of the process. An escrow company is a neutral third party that holds and protects your money and documents during a real estate transaction.

Your real estate agent or loan officer will likely give you a list of escrow companies to choose from, but it’s important that you do your own research too. Here are a few things to keep in mind:
-Check with your state’s department of insurance to make sure the company is licensed and insured.
-Ask for referrals from family and friends.
-Read online reviews.
-Make sure the company has experience with the type of transaction you’re doing (e.g., buying a home, refinancing a mortgage, etc.).
-Ask about fees and compare them among different companies.

Once you’ve chosen an escrow company, you’ll work with an escrow officer who will oversee the transaction and make sure everything goes smoothly.

Get Referrals

Before you choose an escrow company, it’s a good idea to get referrals from people you trust. Your real estate agent or lender may have some suggestions. You can also check with the Better Business Bureau to see if there have been any complaints about the companies you’re considering.

Once you have a few options, it’s time to do some research. Find out how long each company has been in business, whether they’re licensed and insured, and what their fees are. You should also ask about their experience handling transactions like yours.

When you’ve narrowed down your choices, contact each company to get more information. Be sure to ask about their policies and procedures, and find out how they would handle a dispute. Once you’ve gathered all the information, you can make an informed decision about which escrow company is right for you.

Interview Potential Companies

When you’re ready to choose an escrow company, interview several candidates to get a feel for the services they offer and whether they would be a good fit for your needs. Here are some questions to ask:

-How long has the company been in business?
-What is the company’s complaint history, if any?
-How many employees does the company have, and how are they trained?
-What type of surety bond does the company have?
-Does the company use independent agents or employs its own title officers?
-How large are the firm’s reserve funds, and how are they audited?
-What technology does the firm use (for example, online reporting)?

After you’ve interviewed several companies, compare their responses to help you make a decision. Once you’ve chosen a firm, be sure to get everything in writing so that there are no surprises down the road.


Thank you for taking the time to learn about escrow on a home loan. We hope this guide has helped you better understand how it works and how it can benefit you as a borrower. If you have any questions, please don’t hesitate to reach out to our team of experts.

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