The word "escrow" describes two distinct concepts in real estate, and mixing them up is a common source of confusion. In the context of buying a home, escrow is a neutral third party that holds funds and documents until closing conditions are met. In the context of an ongoing mortgage, escrow refers to an impound account managed by your lender that collects and pays your property taxes and homeowner's insurance on your behalf.
Escrow During a Home Purchase
When you make an offer on a home and the seller accepts, your earnest money deposit is placed into escrow — held by a title company, escrow company, or attorney, depending on the state. This neutral party holds the funds until the transaction closes. If the deal closes, the earnest money is applied toward your closing costs or down payment. If it falls through under a contingency (inspection, financing), the earnest money is typically returned to you. Escrow fees for this service range from a few hundred to over a thousand dollars and appear on your Closing Disclosure — use the Closing Costs Calculator to estimate these charges.
Escrow Accounts (Impound Accounts) in a Mortgage
Most lenders require borrowers with less than 20% down to maintain a mortgage escrow account, though many lenders offer it as an option for any borrower. Each month, your lender collects 1/12 of your estimated annual property tax and homeowner's insurance premium alongside your principal and interest payment. The lender holds these funds in your escrow account and pays the tax and insurance bills when they come due. This is why your total monthly mortgage payment (often abbreviated PITI — Principal, Interest, Taxes, Insurance) is higher than just the principal and interest.
How Escrow Accounts Are Managed
Your lender performs an annual escrow analysis to ensure the account balance stays within required limits. If your property taxes or insurance premiums increase, your monthly escrow contribution goes up. If there is a surplus (the account held more than needed), you receive a refund or your future payments are reduced. The Mortgage Calculator lets you include estimated taxes and insurance to see your full PITI payment.
Waiving Escrow
Some lenders allow borrowers with 20%+ equity to waive the escrow requirement — meaning you pay property taxes and insurance directly when due rather than monthly through your lender. Lenders sometimes charge a fee (0.125–0.25% of the loan) to waive escrow, since it removes a safeguard they rely on to protect their collateral. If you opt out, you are responsible for setting aside sufficient funds to cover these lump-sum payments yourself.