What Is an Escrow Account When Buying a Home?

3 days ago
3 min read

Updated: 14 hours ago

What Is an Escrow Account When Buying a Home?

An escrow account is a separate account managed by your lender that holds money for property taxes and homeowners insurance as part of your monthly mortgage payment. Instead of paying these large expenses all at once, you pay a portion each month, and the lender pays the bills when they are due.

In simple terms, escrow makes homeownership more predictable. It spreads out major expenses like taxes and insurance into manageable monthly payments. Most lenders require escrow accounts for buyers who put down less than 20 percent, but even when it is optional, many homeowners choose to use one for convenience.

When Do You Use an Escrow Account in Real Estate?

There are two common timeframes to use and escrow account in real estate:

1. Escrow during a transaction

Holds your earnest money deposit
Protects both buyer and seller
Funds are released at closing

2. Escrow after closing

Managed by your mortgage lender
Pays property taxes and insurance
Included in your monthly mortgage payment

What Other Costs Does an Escrow Account Cover?

Does escrow cover other costs?

Sometimes, depending on your loan:

Flood insurance if required
Private mortgage insurance if applicable
Occasionally HOA dues in specific cases

How Does an Escrow Account Work Each Month?

Your monthly mortgage payment typically includes four parts:

Principal
Interest
Taxes
Insurance

This is often referred to as PITI.

Example monthly breakdown

Loan payment: $2,000
Property taxes: $6,000 annually → $500/month
Insurance: $1,200 annually → $100/month

Total monthly payment: $2,600

Your lender collects the $600 for taxes and insurance and holds it in escrow until bills are due.

Why Do Lenders Require Escrow Accounts?

Lenders use escrow to reduce risk.

If property taxes or insurance are not paid:

The property could face a tax lien
Insurance lapses could put the home at risk

By managing escrow, lenders ensure:

Taxes are paid on time
Insurance coverage remains active

This protects both the homeowner and the lender.

Can You Waive an Escrow Account?

Sometimes, yes.

You may be able to waive escrow if:

You put down 20 percent or more
You have strong credit
Your lender allows it

However, without escrow:

You must budget for large lump-sum payments
You are responsible for paying taxes and insurance directly

What Is an Escrow Shortage or Surplus?

Escrow accounts are reviewed annually by your lender.

Escrow shortage

Occurs when there is not enough money in the account
Caused by rising taxes or insurance costs
You may need to pay a lump sum or increased monthly payments

Escrow surplus

Occurs when too much money is collected
You may receive a refund or reduced payment

How Does Escrow Impact Your Monthly Payment?

Your escrow payment can change over time.

Common reasons include:

Property tax increases
Insurance premium changes
Home reassessments

This is why your monthly mortgage payment may increase even if your loan terms stay the same.

Escrow Account Example in New Hampshire

Using a typical New Hampshire scenario:

Home value: $500,000
Property tax rate: $12 per $1,000
Annual taxes: $6,000
Insurance: $1,200

Monthly escrow portion:

Taxes: $500
Insurance: $100
Total escrow: $600/month

This amount is added to your mortgage payment and adjusted annually.

Key Takeaways

Escrow accounts simplify large homeownership expenses
They are commonly required for financed purchases
They primarily cover taxes and insurance
Monthly payments include escrow contributions
Payments can change based on actual costs

About This Guide

This escrow account explained guide is based on standard mortgage practices, lender requirements, and real-world transaction experience. As a real estate professional working across New Hampshire, Maine, and Northern Massachusetts, I regularly help buyers understand how escrow impacts their monthly payments and overall affordability.

Providing clear, practical explanations of financial components, like escrow, is essential for helping buyers make informed decisions throughout the home buying process.

Need Help Understanding Escrow and Monthly Costs?

If you are buying a home and want a clear breakdown of your full monthly payment, including escrow, I can help you understand exactly what to expect.

Reach out to me, Hunter Letendre, REALTOR® with Berkshire Hathaway HomeServices Verani Realty, serving New Hampshire, Maine, and Northern Massachusetts. I help buyers make sense of the full financial picture so they can confidently move forward knowing how costs like escrow fit into their long-term homeownership plan.