A neutral third-party account that holds funds during a transaction — and also refers to the ongoing account that holds property taxes and insurance after closing.
Full Definition
Escrow serves two functions in real estate. During the purchase process, earnest money and closing funds are held in an escrow account by a neutral third party until all conditions are met and the transaction closes. After closing, most mortgages include an ongoing escrow account where the lender collects monthly portions of property taxes and homeowners insurance alongside the mortgage payment. The lender then pays these bills when they come due. Lenders require escrow accounts for most loans with LTV above 80% to ensure taxes and insurance are always current. Some borrowers waive escrow (with lender approval) and pay these bills themselves, sometimes for a small fee.
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