What Does Escrow Mean?

Published on October 20th, 2016

There are so many different terms used in the mortgage industry it is hard to keep them all straight. But one term confuses a lot of people: escrow. What is escrow? What does is mean to be “in escrow?” Let’s dive right in and educate you so you can be armed with knowledge when you are ready to purchase a home. Think you are ready to start the home buying process? Make sure you fill out our free rate quote to get started.

What does escrow mean?

In general terms, escrow is a third-party intermediary (usually a title company or attorney) that holds and allocates funds, including taxes and insurance, in a mortgage transaction until specific conditions are met. The escrow acts as a central hub where the buyer, seller, lender and broker can deposit or receive funds. The escrow company is known and is referred to as the escrow holder.

What does the escrow holder do?

The escrow holder plays a very important role throughout the home-buying process. When funds are deposited into the escrow account or when documents have been created, the escrow holder is given detailed instructions on what to do with the money deposited. The escrow holder will manage the account until certain conditions have been met; only then will the money be distributed out of escrow.

What is an escrow account?

An escrow account, used by mortgage lenders, holds money for property taxes and homeowner’s insurance, which the lender pays on your behalf. Paying into an escrow account assures the lender the bills are current. Taxes and insurance premiums must be paid on time to avoid a tax lien or foreclosure. Having an escrow account ensures a policy is in place to pay for any damages your home will incur.

Escrow payments will be made every month in addition to your usual mortgage payment. The lender will determine the amount owed each month by calculating the total bills for the entire year and dividing it by twelve. This money is put away in an escrow account until a bill is due, and then the lender will make a payment on your behalf. Your escrow account it analyzed every year by your loan servicer to make sure that the amounts being collected to pay the bills are sufficient, but not too much. The results of this analysis are reported to you. If too much has been collected, you may get a small check. If not enough is being collected, your total monthly payment may need to be increased.

If you ever have any questions, make sure you contact your mortgage advisor. Don’t forget to fill out your free rate quote if you are ready to purchase your dream home!

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