Escrow, in plain English

Two kinds of escrow

People use "escrow" for two different things. During a purchase, it usually means the earnest money held by a title company, attorney or broker until closing. After closing, it means the escrow account that comes with many mortgages. This lesson is about the second one.

How the escrow account works

The company that services your loan keeps the account. It pays your property taxes and homeowners insurance out of it, and flood insurance or mortgage insurance where they apply.

The account is funded by a deposit at closing and by part of each monthly payment.

Why the payment changes

The servicer reviews the account each year. A shortage generally raises the monthly amount unless it's paid off, and a surplus can be refunded. So the yearly review can raise or lower the escrow part of the payment, even on a fixed rate.

Insurance renewals in Florida can move it noticeably.

A buyer's tax bill can also differ from the seller's, since some exemptions and caps reset on a sale. The county property appraiser in Florida, or, in Georgia, the county tax assessor's or tax commissioner's office, is the place to ask about exemptions.

Required, or not

Some loans require an escrow account. On others it can sometimes be waived, depending on the loan and the lender.

On a refinance

A refinance generally opens a new escrow account, funded at closing. The old servicer generally refunds the old account's balance after the payoff. For a short time both can be in play, which is a matter of timing, not paying twice.

The Consumer Financial Protection Bureau explains escrow accounts on its own page.

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