Escrow is simply a way of holding money until certain conditions are met — and in homeownership, it shows up in two distinct situations that are worth understanding separately.
Escrow During the Purchase Process
When you make an offer on a home and put down earnest money, those funds typically go into escrow rather than straight to the seller. A neutral third party — often a title company or attorney — holds the deposit until you reach closing. At that point, the money is applied toward your down payment or closing costs. This protects both sides: sellers know you're serious, and you know your money is safe if the deal falls through under covered circumstances.
Escrow as Part of Your Monthly Payment
Once you own the home and start making mortgage payments, escrow takes on a different role. Your lender collects a portion of each payment to cover your property taxes and homeowner's insurance — expenses that come due on their own schedule, not monthly. Rather than expecting you to save separately for a large tax bill twice a year, your lender builds those costs into your payment and pays them on your behalf when they're due.
Your monthly mortgage statement will break this out, showing how much goes to principal and interest versus your escrow account.
Why Your Payment Can Change Year to Year
Each year, your lender reviews your escrow account to see whether the amount collected matched what was actually paid out. If taxes or insurance costs increased, your monthly payment may go up to cover the shortfall — and you may also owe a one-time catch-up amount. If less was needed than expected, you'll typically receive a refund or see a slight decrease in your payment.
Property tax changes are the most common reason escrow payments shift. Local assessments, mill rates, and exemptions can all affect your tax bill from year to year.
One Thing to Keep in Mind
Not all loans require escrow accounts — some lenders allow borrowers to manage taxes and insurance themselves, usually if you meet certain equity thresholds. Ask your lender early in the process what your options are.
If you're curious how escrow fits into the full picture of a mortgage payment, we're happy to walk you through it.
