Escrow keeps money out of either partyâs hands until the conditions of a transaction have been met.
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Escrow is a way of setting aside money or other assets until theyâre needed or certain conditions are met. Itâs commonly used when buying a home: Money can be held in escrow until the sale closes, and after closing, your mortgage servicer may use an escrow account to collect money for property taxes and homeownerâs insurance.
Escrow is also used in business deals and other transactions when money or property shouldnât change hands until both sides have met their obligations.
Escrow works in different ways depending on how itâs being used. In transactional escrow, two parties agree on conditions that must be met before money, documents, or other assets change hands. An escrow company, title company, attorney, financial institution, or other qualified party may serve as the escrow agent, depending on the transaction and state law. The agent holds the assets until those conditions are met and then releases them to the appropriate party.
The concept of transactional escrow has roots in Anglo-American property and contract law. Traditionally, a deed or other legal document could be delivered to a third party and held until a specified condition was met.
A mortgage escrow account works differently. The mortgage servicer collects money as part of your monthly payment, and holds it to pay expenses such as property taxes and homeownerâs insurance when they come due.
Examples of transactional escrow
A home purchase is a common example of transactional escrow. A buyer deposits earnest money with an escrow or settlement agent while inspections, financing, title searches, and other required processes take place. At closing, when the sale is completed, the agent distributes the money and documents to the appropriate parties.
Escrow is also used in other types of transactions:
- Business acquisition. Part of the purchase price might remain in escrow after the deal closes. An indemnification holdback, for example, can provide funds if the seller later becomes responsible for a covered claim under the purchase agreement.
- Construction contracts. Funds can be held and released as different stages of a project are completed.
- Technology agreements. Software source code can be placed in escrow and released to a customer if specified events occur, such as the developer becoming insolvent or failing to provide agreed-upon support.
- Legal disputes. Disputed money or settlement proceeds can sometimes be held in escrow until the parties satisfy settlement terms or a court determines how the money should be distributed.
What is a mortgage escrow account?
Does your escrow account earn interest?
Maybe. Some states require certain mortgage lenders or servicers to pay interest on money held in escrow accounts. But the rules depend on the type of financial institution holding your money. Under federal regulations that took effect in 2026, national banks and federal savings associations can generally decide whether to pay interest on escrow balances, even in states with interest requirements.
Transactional escrow helps to complete your home purchase. In contrast, a mortgage escrow account can remain in place for the life of the loan, setting aside part of your monthly mortgage payment for expenses such as property taxes and homeownerâs insurance. This form of forced saving makes it easier for homeowners to budget for two sizable expenses, while ensuring mortgage servicers are able to pay the bills when they come due.
Suppose your annual property taxes are $6,000 and your homeownerâs insurance costs $1,800 a year. Thatâs $7,800 in annual expenses, or $650 a month.
With a mortgage escrow account, your servicer can collect that $650 along with the principal and interest portion of your mortgage payment. The servicer holds the money and pays the property tax and insurance bills when they come due. (Mortgage insurance and certain other property-related charges might also be included, depending on the loan.)
Because property taxes and homeowners insurance premiums can change from year to year, the portion of your monthly payment that goes into escrow can change, too. Your servicer typically reviews your escrow account annually to estimate how much will be needed for the coming year and whether your monthly escrow payment should change.
Escrow vs. payment intermediation
Some online marketplaces, such as eBay and StubHub, collect a buyerâs payment and wait to pay the seller until certain requirements are met. Although this process resembles escrow, itâs not the same thing. In transactional escrow, an escrow agent holds money or other assets under an agreement between the parties and releases them when specified conditions are met. A marketplace typically collects and distributes payments according to its own terms and policies.
Not necessarily. For transactional escrow, the requirements depend on the type of transaction, applicable law, and the agreement between parties.
Mortgage escrow requirements vary by loan. Some lenders require an escrow account as a condition of the mortgage. Federal law requires escrow accounts for certain types of loans, including some âhigher-pricedâ mortgages that carry annual percentage rates (APRs) above those generally available to borrowers with similar loans. Government-backed mortgage programs, such as Federal Housing Administration (FHA), U.S. Department of Agriculture (USDA), and Department of Veterans Affairs (VA) loans, may also have their own requirements.
Your loan documents should indicate whether youâre required to have an escrow account.
Mortgage escrow surpluses and shortfalls
Federal rules limit how much extra money a servicer can require you to keep in escrow. Generally, the permitted cushion is no more than one-sixth of the estimated annual escrow expenses, or about two monthsâ worth of escrow payments.
If your annual escrow analysis finds a surplus of $50 or more and your mortgage payments are current, your servicer generally must refund the money within 30 days. If the surplus is less than $50, the servicer can refund it or apply it toward your escrow payments for the coming year.
But what happens if the account has too little money? Suppose your homeownerâs insurance premium last year was $1,800, but this year the premium rises to $2,200. The servicer still pays the bill, leaving a $400 shortfall in your escrow account. Depending on the size of the shortfall, you may be able to pay it in a lump sum or have it divided among future monthly payments. Your annual escrow statement typically explains how the shortfall will be handled.
Your servicer has essentially provided an interest-free loan by adding the shortfall to your monthly escrow payment. But your total monthly mortgage payment will rise until the shortfall is repaid. Plus, the servicer will begin collecting more to cover the higher insurance premium expected for the coming year. So, even if you have a fixed-rate mortgage, your total monthly payment can rise.
This article was most recently revised and updated by Miranda Marquit
