Definition
After you close, your lender sets up an escrow account where they collect a portion of your monthly payment to pay your property taxes and homeowners insurance. This ensures these important bills don't get missed.
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Escrow accounts protect both buyers and sellers by ensuring that earnest money and deposits are held safely by a neutral third party rather than in the real estate agent's or seller's personal account. Once closing conditions are met, the escrow officer releases the funds to the appropriate parties. Escrow accounts should be interest-bearing and comply with state regulations for earnest money handling.
Pro Tip
Ask your lender how much is being held in escrow monthly and what it covers. Budget for escrow adjustments when taxes or insurance increase.
Example
When Sarah made an offer on a $300,000 home, she deposited $10,000 earnest money into an escrow account at a local title company. The title company held the money safely for 45 days until closing, at which point it was credited to her down payment.