Escrow

Escrow is a legal arrangement where a neutral third party holds money or assets on behalf of two parties to a transaction, releasing them when contractually-specified conditions are met. The term covers two distinct uses in US real estate.

Escrow during purchase: when you sign a purchase contract, your earnest-money deposit (typically 1-3% of the home price) sits in escrow with a title company or attorney until closing. If the deal goes through, the escrow money applies to the down payment. If the deal falls through within the contingency window, the escrow is returned. If the buyer walks away outside contingencies, the seller typically keeps it.

Escrow during the mortgage life: the lender holds a separate escrow account into which your monthly payment contributes a portion for property taxes and insurance. When the tax or insurance bill comes due, the lender pays it from the escrow. This protects the lender (the property they have a lien on stays insured and tax-current) and simplifies the borrower’s life (one bill instead of several).

Mortgage escrows are typically mandatory if the down payment is less than 20%. After 20% equity is achieved, borrowers can sometimes opt out and pay tax + insurance directly. Whether to keep the escrow is a personal preference — it’s a forced-saving convenience for some, an unnecessary float for the lender to others.