View All Learning Articles
Is December 2023 a Good Time to Buy a Home?
The 100% HELPER Act Mortgage
The $25,000 Downpayment Toward Equity Cash Grant
The Biden $15,000 First-Time Homebuyer Tax Credit
14 Grants & Programs for First-Time Home Buyers
View All Research Articles
170+ Mortgage Statistics
Generational Home Buyer Statistics
Annual HMDA Home Buyer Study
Most Popular Places for Vacation Homes In Every State
Gen Z Home Buyer Distribution By Location
Younger Millennial Home Buyer Distribution By Location
Older Millennial Home Buyer Distribution By Location
ZIP Code Invasions: Gen Z
ZIP Code Invasions: Younger Millennials
ZIP Code Invasions: Older Millennials
Since 2003, Dan Green has been a leading mortgage lender and respected industry authority. His unwavering commitment to first-time home buyers and home buyer education has established him as a trusted voice among his colleagues, his peers, and the media. Dan founded Homebuyer.com to expand the American Dream of Homeownership to all who want it. Read more about Dan Green.
Homebuyer.com is your trusted guide to homeownership. Since 2003, our team has offered real-world expertise and advice to tens of millions of U.S. home buyers. Our content stands on its integrity: it's factual, unbiased, and free from outside influences. Read more about our governing editorial guidelines.
We also exist for profit and want our readers to understand how we make money.
Homebuyer.com is a mortgage-company-affiliated publisher. We earn compensation when you click specific links on the website, or apply for a mortgage with Homebuyer.com or partner listed in our comparison tables. Our partners compensate us differently, so we randomize our tables to protect our readers from steering. We may also earn compensation for advertisements on the site, which are indicated clearly. Note that limitations in our software, whether we originate mortgages in your area, and credit factors may affect the offers and comparison tables you see on various parts of this site. We do not include offers for every mortgage product available. Someday, we hope we will.
Your trust matters to us. This article was thoroughly checked for accuracy as of November 7, 2023. Homebuyer.com ensures every piece of information we share reflects the latest in mortgage standards. Learn more about our commitments to our reader in our editorial guidelines.
When buying a home, your escrow provider is a valuable member of your team. However, many home buyers and sellers can’t answer the question “what is escrow?” or explain how it works.
In a real estate transaction, a trusted third party is hired to hold all documents and funds for both buyer and seller. This third party can be a law firm, title company, or escrow company, and the documents and funds are held “in escrow.” The escrow provider safeguards your funds and protects all parties by ensuring the terms of the purchase contract and mortgage agreement are carried out.
Let’s look at the various types of escrow accounts in the real estate process and how they work.
When you sign a purchase contract, there may be an earnest money deposit involved. This is an up-front amount that comes from your down payment and shows the seller you’re committed to buying the home.
To protect both the buyer and the seller, the money is held in an escrow account managed by an independent and trusted third party until it’s time to close on your home.
Why do both parties need to be protected?
When a seller accepts an offer, they take the property off the market. If the buyer backs out, the seller often keeps the earnest money as compensation.
If the seller does not meet the contract terms or are unable to deliver the home in the same condition as when the contract was made, the earnest money would be returned to the buyer, releasing the buyer from the contract.
The escrow officer or escrow agent follows through on these agreed upon terms and provides the funds to the appropriate party.
In addition to the earnest money, the escrow account is typically used to hold funds for down payment and closing costs, credits back from the seller, and any other funds that are part of the transaction.
After the closing is complete, the escrow holder will distribute all funds as detailed in the real estate contract and mortgage agreement. These payments include real estate agent commissions, loan origination, title, and insurance fees, HOA dues, the purchase funds from your mortgage loan, and any other closing costs as detailed in your final Closing Disclosure.
The escrow agent carefully follows the details of the real estate contract and the written instructions of your lender so all funds get where they need to go.
Escrow accounts are common in real estate and are used widely in other business transactions as well.
There are two types of escrow accounts typically used in the real estate process.
As detailed above, the first type of escrow account is used to manage the transaction when you buy a home.
The second type of escrow is called a mortgage escrow account.
A mortgage escrow account begins at loan closing and lasts for the life of your loan.
With a mortgage escrow account, you make monthly payments to the lender for your property taxes and homeowners insurance.
This money is added to your monthly mortgage payment and is held by the mortgage company. They pay your property taxes and homeowners insurance when they are due.
Escrow accounts are typically required when you finance more than eighty percent of a home’s value, so most first-time buyers will enjoy the ease of budgeting provided by an escrow account automatically.
Escrow accounts are useful in any situation where two parties want protection until agreed upon terms are met. Here are some non-real estate examples.
Renters Escrow
If you’ve ever rented an apartment or house, you know that landlords can sometimes fail to make necessary repairs or improvements in a timely fashion. A renter’s escrow account allows you to place your rent with a third party to be given to the landlord when the necessary repairs are made or working appliances are installed. This gives the renter some leverage to ensure their unit is repaired as promised.
Escrow and Online Shopping
The growth of online shopping over the past two decades has led to increased use of the escrow process for the protection of buyers and sellers. In this situation, the buyer puts the purchase price into an escrow account where it is held until the shipped item is received. Once the item is in hand, the funds can be released to the seller.
Escrow and Stocks
Stocks can be held in escrow for a variety of reasons. Frequently, stocks are held by a trusted third-party during a merger, acquisition, bankruptcy, or reorganization. A company may, for a period, hold stocks in escrow that have been awarded to an employee. This is called a vesting period and is used as an incentive to keep the employee on staff.
The cost of escrow fees will depend on the escrow company you use and the location of the home, but they will typically be one to two percent of the purchase price.
Because this service benefits both the buyer and seller, both parties typically pay a portion of this fee at closing.
The escrow fee will be listed on your Loan Estimate at the beginning of the process, and on the Closing Disclosure which you’ll receive before closing.
Escrow accounts offer several benefits to all parties in the real estate process.
First, placing all instructions and funds into the hands of a third party while under contract offers security to the buyer and seller, ensuring all contract requirements will be met and agreed upon money will be paid.
Second, real estate escrows provide assurance to the buyer, seller, and lender that — should the deal go south — no one’s investment will be jeopardized. Funds are protected and will be returned to the appropriate party.
Third, a mortgage escrow account assures you and your lender that your taxes and insurance are kept up to date.
Finally, the mortgage escrow account provides you with a stress-free process. Paying a predictable amount each month makes it easier to budget and you don’t have to worry about tracking the due dates for your taxes and insurance policies.
Escrow is an essential part of a real estate transaction and mortgage process. Here are some commonly asked questions we see on a regular basis:
Escrow is an account that holds your funds for earnest money, down payment, and closing costs, as well as the purchase funds from your mortgage lender. At closing, all funds will be distributed to the applicable parties for a stress-free closing on your home.
The real estate escrow fee is a one-time charge that you pay as part of your closing costs.
Your mortgage escrow is paid with your monthly mortgage payment to cover property tax and insurance payments. Mortgage escrows typically last the length of the mortgage.
Escrow is a valuable and essential tool in the purchase process, providing security for both the buyer and seller of the property.
Mortgage escrows help the buyer manage their taxes and insurance payments. They are free of charge and provide easy budgeting for home buyers.
Your home purchase is one of the biggest investments you will make. Over the past century of buying and selling real estate in the United States, many processes have been put into place to protect the home-buying process, as well as your homeownership rights. The escrow account is an essential tool that offers protection to everyone in the process.
Be a better buyer. Subscribe now and never miss out on exclusive insights, new market trends, and first-time buyer programs.
Finding your dream starts here. Apply in minutes.
Mortgage Rate Assumptions
The Homebuyer.com mortgage rates shown on this page are based on assumptions about you, your home, and the state where you plan to purchase. The rate shown is accurate as of , but please remember that mortgage rates change without notice based on mortgage bond market activity.
The Homebuyer.com mortgage rates shown on this page are based on assumptions about you, your home, and the state where you plan to purchase. The rate shown is accurate as of {{ formatDate(rates[0].createdAt) }}, but please remember that mortgage rates change without notice based on mortgage bond market activity.
Our mortgage rate assumptions may differ from those made by the other mortgage lenders in the comparison table. Your actual mortgage rate, APR, points, and monthly payment are unlikely to match the table above unless you match the description below:
You are a first-time buyer purchasing a single-family home to be your primary residence in any state other than New York, Hawaii, and Alaska. You have a credit score of 660 or higher. You are making a down payment of twenty percent and using a 30-year conventional fixed-rate mortgage. You earn a low-to-moderate household income relative to your area.
The information provided is for informational purposes only and should not be confused for a mortgage rate commitment or a mortgage loan approval.
Legal Disclosures
{{ rate.lender }}. The {{ formatRate(rate.thirtyYearFixed) }} mortgage rate ({{ formatRate(rate.apr) }} APR) shown above for {{ rate.lender}} is based on information published on the lender's website and retrieved on {{ formatDate(rate.createdAt) }}. According to its website, {{ rate.lender }}'s published rate requires home buyers to pay {{ formatPoints(rate.points) }} points at closing, totaling {{ formatDollars(rate.cost) }}, on an example {{ formatDollars(rate.loanAmount) }} 30-year fixed-rate conventional mortgage. Its mortgage rate assumes the home buyer will make a {{ formatDollars(rate.downPayment) }} downpayment or larger and purchase a single-family residence. Its mortgage rate also assumes that the home buyer will have a credit score of {{ rate.fico }} or higher. The monthly payment for the mortgage with the above terms is {{ formatDollars(rate.monthlyPayment) }} for 360 months, plus taxes and insurance premiums. {{ rate.lender }} provides this information for estimation purposes only and does not guarantee accuracy. Your mortgage rate, APR, loan size, and fees may vary.