What is an Escrow on a Mortgage?

Posted: 2/1/2021 | Read Time: 3min

Buying a new home can be exciting and yet very overwhelming for a first time homebuyer. There is a lot of paperwork involved and, unless you are a real estate professional, you will most likely hear words and phrases you don’t understand. One of those words may be escrow. What is escrow and how does it work?

The escrow process occurs between the time a seller accepts an offer and a buyer gets the keys to their new house. This is different from what is escrow on a mortgage. Let’s dive into the world of escrow and make you an escrow expert, starting with the escrow meaning for a mortgage. 

 

What is Escrow on a Mortgage? 

Escrow is an account that’s paid from each month as a part of your monthly mortgage. This is done to ensure there is always enough money available to pay for property taxes and homeowners insurance. Your realtor will create an escrow account during the home purchasing process. This account is only temporary. There is another escrow account that will be created on your behalf by the lender. This escrow account will be used for the entire life of the loan. 

 

During the process of calculating your monthly mortgage payment, the lender will account for things such as property taxes and homeowners insurance. You won’t pay those from your checking account. They have been built into your monthly payment in the form of an escrow account. When property taxes and homeowners insurance payments are due, they will be paid by your lender from your escrow account. This is a safe way to ensure you don’t miss those very important payments which would cause a lien to be placed against your home. 

 

Now that you understand what is escrow on a mortgage, it is important to know how this differentiates from the escrow process. 

 

Understanding the Escrow Meaning and Process 

Before you can have an escrow on a mortgage, you have to go through the escrow process, during which the buyer and the seller deposit all instructions, documents, conditions, along with the funds for the transaction, with a third neutral party until conditions have been met. 

 

In the case of purchasing a home, the buyer does not pay the seller directly for the property. After the buyer and the seller arrive at the purchase price and complete the purchase agreement, the buyer’s real estate agent will collect any earnest money, aka good faith deposit and deposit it in an escrow account at the escrow company specified in the purchase agreement. The escrow company then can transfer the ownership of the property to the buyer through recordation and pay the seller.

 

During the escrow process, the buyer awaits the lender’s appraisal, secures the financing, obtains a home inspection, purchases home insurance and approves all seller’s disclosures on the property. The buyer will also purchase their title insurance and report to ensure there are no liens on the property. Title insurance protects the buyer and lender from any potential challenges that could arise. Prior to closing escrow, the buyer will conduct their final walk-through of the property. After signing all the paperwork, the escrow agent will prepare a new deed stating the new owner and send it to be recorded, concluding the home purchasing process. 

 

Congratulations! You are now an escrow expert and no longer have to ask, “what is escrow?” If you’re thinking about buying a new home, partner with an experienced mortgage lender today to ensure you become a happy and successful homeowner. Because not every mortgage company is created equal, here are mortgage questions to assist you along the way.


Maggie joined the Wyndham Capital Mortgage team in November 2020 as a Content Strategist. She has more than six years of content creation experience, which includes launching WBTV’s digital brand Queen City Weekend (now QC Life) and garnering more than 1.1 million page views across her articles. With a love of storytelling, she hopes to bring that passion to WCM and the many families it serves. She resides in Charlotte, North Carolina, and can often be found at a coffee shop, latte in hand.

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