“Escrow” is one of those real estate words that can mean slightly different things depending on when you hear it. During a purchase, it often refers to a neutral party holding money and documents. After closing, it usually refers to an account your lender uses to pay property taxes and insurance. Both are worth understanding.
Escrow during a home purchase
When you make an offer, your earnest money deposit is commonly held by a neutral third party, such as a title company, escrow company, attorney or brokerage, depending on local practice. That party follows the instructions in your contract. In some regions, “being in escrow” describes the entire period between an accepted offer and closing, while a neutral escrow holder manages documents and funds.
The idea is simple: neither buyer nor seller controls the money until the conditions of the contract are met.
The mortgage escrow account
After closing, many lenders set up an escrow account, sometimes called an impound account, to pay certain property-related bills on your behalf. Each month, part of your mortgage payment goes into this account. When property taxes or insurance premiums are due, the lender pays them from the account.
Escrow accounts commonly cover:
- Property taxes.
- Homeowners insurance premiums.
- Flood insurance, if required.
- Mortgage insurance, if applicable.
Some loans require an escrow account. With others, borrowers may be able to pay these bills directly. Ask your lender which applies to you.
Annual escrow analysis
Because taxes and insurance costs change, lenders typically review escrow accounts once a year. This analysis compares what was collected with what was paid out and projects the coming year’s costs. Federal rules govern how escrow accounts are managed, including limits on how large a cushion lenders can require.
After the analysis, your monthly payment may go up or down. If there is a shortage, you may be asked to make up the difference, often spread across the following year. If there is a surplus above a certain amount, you may receive a refund.
Why escrow can be helpful
Many owners appreciate that escrow spreads large annual bills into smaller monthly amounts. It also reduces the risk of missing a tax or insurance payment. The tradeoff is that your monthly payment can change from year to year, even with a fixed-rate loan.
Tips for staying on top of it
- Read your annual escrow statement when it arrives.
- Watch for notices about property tax reassessments from your county.
- Review your insurance renewal each year and let your lender know if you change insurers.
- Contact your loan servicer promptly if something looks wrong.
The Consumer Financial Protection Bureau explains escrow accounts at ConsumerFinance.gov. For questions about your loan, contact your lender or servicer. When you are ready to start your search, reach us through our contact page.
How Escrow Works in a Georgia Purchase
In Georgia, the money and paperwork side of a purchase usually runs through a closing attorney and, early on, through the holder of the earnest money named in the contract. That holder may be a brokerage or the closing attorney, depending on what the parties agree. You may not hear people say “we are in escrow” as often as in some other states, but the principle is the same: funds are held by a neutral party and released according to the contract.
At closing, the attorney’s office collects funds from the buyer and lender, pays off the seller’s existing loan, handles recording, and distributes money as shown on the settlement statement. Part of the money you bring to closing may also be used to set up your new mortgage escrow account.
Putting It Into Practice: Understanding Your Initial Escrow Deposit
Many buyers are surprised to see escrow items on their Closing Disclosure. Here is what usually happens and why.
- Prepaid insurance. Lenders commonly require the first year of homeowners insurance to be paid at or before closing.
- Initial escrow deposit. To make sure there is enough money in the account when the next tax or insurance bill comes due, the lender collects a starting balance at closing. The amount depends on when those bills are due and how many monthly payments will be made before then.
- Cushion. Lenders may hold a limited extra amount as a buffer, within the limits set by federal rules.
- Monthly contributions. After closing, part of each payment goes into the account so the next bills can be paid on time.
Your lender can show you how your initial deposit was calculated. If anything looks unclear on your Loan Estimate or Closing Disclosure, ask.
Common Escrow Surprises and How to Prepare
- A higher payment after the first year. When a home sells, the tax bill may change, and exemptions the previous owner had may not apply to you. The first escrow analysis can reflect those changes.
- An escrow shortage notice. If taxes or insurance rose more than projected, you may be asked to cover the difference. Many servicers let you pay it all at once or spread it over the next year.
- Insurance changes you did not tell the lender about. If you switch insurers, let your servicer know right away so the right company gets paid.
- Missing a homestead exemption. In Georgia, homestead exemptions are applied for through the county. If you qualify and apply on time, it may affect your tax bill and, in turn, your escrow. Check with your county tax office for deadlines.
- A loan transfer. Your loan may be sold or transferred to a new servicer. The escrow account generally moves with it, but watch your statements and keep paying as instructed in official notices.
Questions Readers Ask
Can I cancel my escrow account?
Some loans allow you to waive escrow, sometimes after a period of on-time payments or with sufficient equity. Others require it. Ask your servicer about your loan’s rules.
Why did I get an escrow refund?
If the annual analysis finds more money in the account than needed, a surplus above a certain amount may be returned to you.
Who do I call if my taxes were not paid?
Contact your loan servicer first, using the contact information on your statement. Keep copies of any tax bills and notices you receive.
Is my escrow account the same as my earnest money?
No. Earnest money is held during the purchase and credited at closing. A mortgage escrow account is set up by your lender after closing to pay ongoing bills.
For details on your loan, your lender or servicer is the best source, and a real estate attorney can explain how funds are handled at closing.
