Escrow
Quick Definition
A financial arrangement where a neutral third party holds funds or documents until specific conditions are met.
Key Takeaways
- Escrow protects both parties in real estate transactions by holding funds neutrally
- Mortgage escrow accounts collect monthly payments for taxes and insurance
- Escrow analysis is performed annually to adjust for changes in tax and insurance costs
- Some borrowers can request escrow waiver after reaching 20% equity
What Is Escrow?
Escrow is a legal and financial arrangement in which a trusted third party temporarily holds money, property, or documents on behalf of two transacting parties until predetermined conditions are fulfilled. In real estate, escrow serves two primary functions: during the home purchase process, an escrow company holds the buyer's earnest money deposit until closing; after closing, a mortgage escrow account collects monthly payments for property taxes and homeowner's insurance, which the lender pays on the homeowner's behalf. Escrow accounts protect both buyers and lenders by ensuring funds are properly allocated and obligations are met. Lenders often require escrow accounts, especially for borrowers with less than 20% down payment.
Escrow Example
- 1A buyer deposits $10,000 in earnest money into escrow to show good faith when making an offer on a $350,000 home.
- 2A monthly mortgage payment of $2,100 includes $1,400 for principal and interest plus $700 held in escrow for taxes and insurance.
- 3The escrow company reviews the title search, coordinates document signing, and distributes funds at the real estate closing.
Related Terms
Mortgage
A loan secured by real property used to purchase a home, typically repaid over 15 to 30 years.
Down Payment
An upfront cash payment made when purchasing a large asset, representing a percentage of the total purchase price.
Closing Costs
Fees and expenses paid at the finalization of a real estate transaction, beyond the property's purchase price.
Home Equity
The portion of a home's value that the owner actually owns, calculated as market value minus outstanding mortgage balance.
FAFSA (Free Application for Federal Student Aid)
The federal form used to determine eligibility for financial aid including grants, loans, and work-study programs.
401(k)
An employer-sponsored retirement savings plan with tax advantages, often including employer matching contributions.
Expand Your Financial Vocabulary
Explore 130+ financial terms with definitions, examples, and formulas
Browse Personal Finance Terms