Mortgage Basics – Escrow

Part 2 of our Mortgage Basics series. Escrow is part of the mortgage process in a real estate transaction. Understanding escrow is important in understanding mortgage basics.

If you haven’t yet, please read Part 1,Mortgage Basics

What is Escrow?

An escrow is an account. Essentially, it is a “holding account”. An escrow account can be established before the closing to make sure the closing goes smoothly and everyone is paid what they are owed. The escrow holds all important documents and deposits while the seller and buyer work out the details of the deal.

An escrow agent oversees the account and typically receives a fee, which can be a small percentage – 1%-2% – of the home’s cost. After the closing, the agent records the deed and title transfer, making the home officially yours.

There is a second type of escrow account that exists while you have a mortgage. This long-term escrow account is between you and the lender and typically holds money to pay property taxes and insurance. The account is replenished by your monthly mortgage payments, which would include an extra amount earmarked for the escrow account.

The monthly escrow amount is adjusted at the end of the year by the lender to account for the actual payments made for taxes and insurance. If you overpaid the escrow over the year, the lender would refund you the difference. If you were short, the lender will usually allow you to spread the difference out over the upcoming year.

If your lender allows you to pay your insurance and taxes directly, then this 2nd escrow account would not be needed. However, there is an advantage in having this account as it helps to budget by making monthly payments into the account to cover tax and insurance bills. Without the escrow, you would need to be disciplined in setting aside money monthly to cover either the semi-annual or annual tax and insurance payments (Insurance would likely be monthly).

In Summary

Insurance payments and tax payments are usually held in escrow. The mortgage company will pay these bills when they are due. A portion of your monthly payments funds the escrow account.

An escrow may be set up during the purchasing negotiations of your home, which helps protect both the buyer and the seller.


If you are in Connecticut or Massachusetts, and in the market for a new home, contact us and let’s review your options. As a mortgage broker, we have access to a wide range of mortgage products and can find one that works for your unique situation.

Use our Quick Quote form on our homepage or our Get Started form. Call us at (860) 285-0635 or email Mark or Samir (MHarrington@HorizonHomeMtg.com / SDoshi@HorizonHomeMtg.com), and we will connect you with any of our friendly, experienced team members.

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Read the next article in our Mortgage Basics series, “Types of Mortgage Loans

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