Escrow

Definition

Escrow has two meanings in real estate, and both come up constantly. The first is the escrow process during a home purchase. When you buy a house, an escrow company (a neutral third party) holds the buyer's deposit, coordinates inspections, title searches, and loan documents, and only releases everything when all conditions of the sale are satisfied. "Close of escrow" is the moment ownership officially transfers. The second meaning is an escrow account (also called an impound account) that your mortgage servicer maintains after you buy. Each month, part of your mortgage payment goes into this account to cover property taxes and homeowner's insurance. The servicer pays those bills on your behalf when they come due.

Why it matters

Understanding the escrow process matters because it protects both buyer and seller during a home transaction. Neither party has to trust the other with large sums of money because the escrow company handles everything. The equity in your home builds through the amortization process, but your escrow account affects your total monthly payment. Your mortgage statement might show a payment of $3,200, but only $2,400 of that is principal and interest. The other $800 is sitting in escrow waiting to pay your property tax and insurance bills. If your property taxes go up (common after a reassessment), your escrow payment increases too, which raises your total monthly payment even though your interest rate has not changed. Many California buyers are surprised to learn that supplemental property tax bills are not paid through escrow and must be paid directly to the county. You can estimate the tax portion of your escrow with the California Property Tax Calculator.

Quick example

You buy a $600,000 home. During the purchase, the escrow company holds your $30,000 deposit until closing. After closing, your lender sets up an escrow account. Your monthly payment is $3,800: $2,900 for principal and interest, $600 for property taxes, and $300 for homeowner's insurance. The lender collects $900 per month in escrow and pays your tax and insurance bills when they come due.

The bottom line

Knowing what Escrow means helps you make better day-to-day money decisions. It makes rates, account options, and tradeoffs easier to compare.