| Feature | Mortgage escrow account | Purchase escrow |
|---|---|---|
| Purpose | Pays taxes and insurance | Holds funds during a sale |
| Duration | Ongoing through the loan | Temporary, until closing |
| Held by | The loan servicer | A neutral third party |
| Also called | Impound account | Transaction or closing escrow |
Glossary · Financing & mortgages
Escrow Account
A mortgage escrow account, sometimes called an impound account, is an account the lender maintains to collect and pay your property taxes and homeowners insurance. You pay a portion each month as part of your mortgage payment. The lender then pays those bills when due, ensuring the obligations are met and the collateral stays protected.
Also known as: Impound Account
How does an escrow account work?
Each month you pay one-twelfth of your estimated annual taxes and insurance into the escrow account along with principal and interest. The lender holds the funds and pays the tax and insurance bills when they come due, so you avoid large lump-sum payments.
This is the taxes and insurance portion of a PITI payment. Spreading those bills across twelve months makes budgeting easier and keeps the payments current.
Because tax assessments and insurance premiums change, lenders run a periodic escrow analysis and adjust your monthly amount up or down to match the new totals.
Why do lenders require escrow accounts?
Lenders require escrow to protect their collateral. Unpaid property taxes can become a lien ahead of the mortgage, and a lapsed insurance policy leaves the home unprotected. Collecting these funds monthly ensures the bills get paid and the lender's interest in the property stays secure.
A tax lien can take priority over the mortgage, so lenders want certainty those bills are paid on time.
Escrow is especially common on loans with smaller down payments and on government loans. Some borrowers with larger down payments can waive it, sometimes for a small fee.
What is the difference between a mortgage escrow account and purchase escrow?
A mortgage escrow account is ongoing and holds monthly funds for taxes and insurance during the loan. Purchase escrow is a temporary, neutral third-party account that holds the deposit and funds during a home sale. They share the name escrow but serve different purposes.
Purchase escrow exists only during the transaction, closing out once the sale funds and records.
The mortgage escrow account continues for years, adjusting over time as tax and insurance costs change across the life of the loan.
Worked example. For example, a homeowner owes 4,800 dollars in annual property taxes and 1,200 dollars in yearly homeowners insurance, totaling 6,000 dollars. The lender collects one-twelfth each month, adding 500 dollars to the mortgage payment, and pays the bills when due. If taxes rise the next year, the escrow analysis raises that monthly amount to cover the higher total.
Common mistakes with Escrow Account
- Do not assume your escrowed payment is fixed, because taxes and insurance can rise and increase your monthly amount.
- Do not ignore the annual escrow analysis, since it explains payment changes and any shortage or surplus.
- Do not confuse the mortgage escrow account with the purchase escrow that holds funds during a sale.
- Do not stop paying attention to your tax and insurance bills, since errors in escrow can still occur and cost you.
- Do not waive escrow without a plan to save for the large tax and insurance bills you will owe directly.
Related terms
Term
Escrow
A neutral third party holds funds and documents until the conditions of a sale are met.
Define TermPITI
The four components of a typical monthly mortgage payment: principal, interest, taxes, and
Define TermClosing Costs
The fees and expenses, beyond the purchase price, that buyers and sellers pay to finalize
Define TermProration
The fair division of ongoing property expenses between buyer and seller at closing.
DefineEscrow Account FAQ
Why did my escrow payment go up?
Escrow payments rise when property taxes or homeowners insurance premiums increase. During the annual escrow analysis, the lender recalculates your monthly amount to cover the higher bills and may also collect extra to make up a past shortage.
Can I remove my escrow account?
Some borrowers, often those with larger down payments and strong credit, can waive escrow and pay taxes and insurance directly. Lenders may charge a fee to waive, and government loans typically require escrow, so options vary by loan type.
What is an escrow shortage?
A shortage happens when your escrow balance falls below what is needed to pay upcoming bills, usually because taxes or insurance rose. Lenders let you pay the shortage as a lump sum or spread it across the next year's payments.
Is a mortgage escrow account the same as closing escrow?
No. A mortgage escrow account is ongoing and pays your taxes and insurance during the loan. Closing or purchase escrow is a temporary, neutral account that holds funds during the home sale and closes once the transaction records.
What happens to my escrow balance when I sell?
When you pay off the mortgage by selling or refinancing, the servicer closes the escrow account and refunds any remaining balance to you, typically within a few weeks. You then handle future tax and insurance bills directly or through a new loan.
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