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Escrow is a type of account used to stow money for an upcoming home purchase. It can also be used for future property taxes and insurance costs on a home you already own. Depending on your lender, you could use an escrow account both upfront and over the entire course of your loan.
Here’s what you need to know about escrow:
What escrow accounts do
Escrow accounts have two different functions depending on when they come into play.
Before closing: Hold your earnest money
Once you find a home and put in an offer, you’ll give the seller what’s called an earnest money deposit. This is a good faith payment — one the seller gets to keep if you back out of the deal or violate your contract. It’ll typically cost about 1 to 2% of the home’s price.
If the seller accepts your offer, that earnest money deposit will be held in an escrow account for safekeeping until you either close on the home or back out of the transaction. If you do close on the home, the money will go toward your closing costs.
Escrow costs are just one of the many expenses you’ll face as a homebuyer. To lower your overall monthly expenses, make sure to shop around for great mortgage rates. You can find prequalified rates easily with Credible — and it only takes a few minutes.
After closing: Pay taxes and insurance
Another type of escrow you may encounter is “reverse account escrow.” This escrow comes into play after your home purchase is complete — and in perpetuity while you own the property.
Put simply, these escrow accounts are used to store a portion of your monthly mortgage payments. Once your property taxes and homeowners insurance premiums come due, your loan servicer will use the account balance to pay them off.
After you apply for a mortgage, your lender should give you a loan estimate that breaks down the four portions of your monthly payment: principal, interest, taxes, and insurance. This will give you an idea of how much will be withheld for escrow and how much will go toward paying off your loan each month.
Learn More: How to Lower Your Monthly Mortgage Payment
What escrow doesn’t cover
Escrow can be a handy tool in planning for the larger costs of homeownership. But be careful — it won’t cover everything.
There are many other costs of homeownership to think about, too. Take a look below to see what’s covered by escrow.
|Expense||Covered by escrow?|
|Homeowners insurance premiums||Yes|
|Earnest money deposit||Yes|
Are escrow accounts required?
Most home loans come with escrow requirements. Though these will make your monthly payment higher nominally, they really just spread the cost of your taxes and insurance out over time.
They also prevent you from falling behind on your payment deadlines and eliminate some of the hassle that comes with homeownership (you don’t have to keep track of those deadlines by yourself).
If you’re shopping around for a home loan, be sure to compare multiple lenders before settling on a rate. Credible streamlines the home loan process and makes comparing multiple lenders easy — you can see your prequalified rates from our partner lenders in the table below in just a few minutes.