Everything About Escrow Accounts and How They Work Everything About Escrow Accounts and How They Work

Learn more about escrow accounts and how they work, the different types of escrow accounts, and why escrow is an important part of home buying.

Quick Links:

• What Does Escrow Mean and What Is an Escrow Account?
• What is an Escrow Account?
• What Does "In Escrow" Mean for Buyers and Sellers?
• What is an Escrow Payment?
• How Do These Monthly Payments Work? 
• What is an Escrow Analysis Statement?
• Escrow FAQs 

What Does Escrow Mean and What Is an Escrow Account?

If you're a home buyer you'll be hearing the terms escrow payment and escrow account a lot, both during the home buying process and after you become a homeowner while paying off your mortgage. As you navigate the journey to homeownership and then begin to make your monthly mortgage payment as a homeowner, you'll hear escrow used these two different contexts – escrow account and escrow payment. They have different meanings and serve different purposes for both home buyers and homeowners.

Below we'll dive into what an escrow account is, the two types of escrow accounts, how escrow works during the closing process, what monthly escrow payments are and how they work, what an escrow analysis statement is, and more!

Key Takeaways:

• An escrow account is used to protect the buyer's earnest money deposit so it goes to the right party once the sale is finalized
• Property taxes and homeowner’s insurance are paid into a mortgage escrow account, also called an impound account.
• Your lender uses this impound account to ensure that funds for your tax and insurance payments are paid on time.
• An escrow analysis statement is a complete review of your account that helps confirm there are enough funds to pay your insurance premiums and property taxes.

What is an Escrow Account?

A neutral third party, known as an escrow agent, usually manages the escrow account to protect the buyer's earnest money deposit so that when the sale closes the money goes to the right party according to the conditions of the escrow agreement. The important thing to note here is that in a home purchase, an escrow account is used to protect both the buyer and seller.

When you're buying a home, a deposit of earnest money is held in an escrow account until a contract is negotiated and the deal is closed as part of the real estate transaction. This earnest money deposit shows the seller that the buyer is serious about purchasing their home and protects them in the event that the potential buyer backs out of the deal. If the agreement falls through because of the buyer, the seller gets to keep the earnest money deposit. If the agreement goes through without issue, the earnest money deposit is usually applied to the buyer's down payment. It's also an incentive for buyers to use to get their offer noticed. 

The escrow agent or escrow company involved in the transaction handles the transfer of property and exchange of money to ensure both buyer and seller receive what the contract stipulates. Sometimes, even if the home purchase is successful, the buyer's deposit can be held in escrow past the sale. This is called an escrow holdback and occurs if there are extra conditions as part of the home sale agreement like the seller being able to remain in the home for a month past the sale or if there were issues with the property discovered during the final walkthrough. 

What Does "In Escrow" Mean for Buyers and Sellers?

You may have heard the phrase "in escrow" before or even seen it on a "For Sale" sign outside a home in your neighborhood. It simply means that all relevant funds have been placed in an escrow account and are being held by an escrow agent until the conditions of the sale agreement are met. These conditions can include everything from receiving an appraisal to a title search to having financing approved. While funds are held in escrow neither the buyer nor seller can access them until all of the conditions of the sale are met. Buyers and sellers close escrow when all conditions of the agreement are met and funds are applied to the buyer's down payment. 

What is an Escrow Payment?

Part of homeownership is paying for property taxes and homeowners insurance. Taxes or insurance are paid into a mortgage escrow account, also called an impound account. Your mortgage lender uses this impound account to ensure that funds for your tax and insurance payments are paid on time to avoid a foreclosure on your home or having to take out additional homeowner's insurance on your behalf.

How Do These Monthly Payments Work? 

Homeowners can expect to pay an amount into their escrow account each month based on their estimated annual property tax and insurance premiums which can change throughout the life of your mortgage loan -- your mortgage servicer will notify you if your payment amount changes. Your mortgage company may collect a monthly payment, including principal and interest, and then use those funds to pay taxes and insurance premiums on your property on your behalf. 

When you close on your home, it's not uncommon for your lender to require at least two months of property taxes and insurance premiums into your impound account. These payments are not considered closing costs and are directly applied to your future insurance and tax payments. 

What is an Escrow Analysis Statement?

Your escrow analysis statement is a complete review of your account that helps confirm there are enough funds to pay your insurance premiums and property taxes. This statement provides insight into the assessment of your escrow account and any resulting changes to your monthly payment. Every month, your mortgage lender will send you a statement showing you how much you've accrued in your escrow or impound account. Annually, (usually in May), mortgage servicers are required to send you an analysis statement breaking down various activities and status updates about your escrow account. Below are some of the most common elements that might appear on your analysis statement:

1. Escrow Activity Summary: The escrow activity summary features a breakdown of the factors used in your analysis to determine any changes to your monthly payment. This includes all expected and actual transactions during the previous 12 months.
2. Escrow Projection Summary: This section usually includes an estimate of activity in your escrow account during the coming year based on anticipated payments. The projection summary outlines projected payments, disbursements, and account balances for the next 12 months.
3. Projected Disbursement Summary: The Projected Disbursement Summary is the projected amount of taxes and insurance to be paid over the coming 12 months based on what was owed during the previous year. 
4. Escrow Analysis Summary: The Escrow Analysis Summary details whether the analysis indicates a projected surplus, shortage, or deficiency of funds to cover your expected property tax and insurance premium payments.
5. Payment Change: The Payment Change section identifies the difference between your previous monthly payment and your new monthly payment. It includes a breakdown of your old and new principal, interest, escrow, and total payment.
6. Escrow Shortage Payment Notice: This section indicates if your escrow account has a shortage for the amount listed. 

For more information, be sure to check out our detailed breakdown of what appears on a Leader Bank Escrow Analysis Statement. 

Escrow FAQs 

Didn't find what you were looking for in this blog post or want to further explore how escrow accounts and payments work? We've got you covered! Check out our escrow FAQ page for a full breakdown of some of the most commonly asked questions we get from our clients about the escrow process.