When buying or selling a home, the buyer and seller have a neutral third party act as an escrow agent. When a purchase agreement is signed, a buyer puts a deposit, or earnest money, in escrow. The earnest money stays in escrow until closing day.
The money held in escrow has benefits for the buyer and the seller. With earnest money held, the seller will take the home off the market, as they know the buyer is serious. Because nobody can touch the money, it also ensures the buyer will get the deposit back if a contingency is not met during the inspection or appraisal process.
Escrow accounts are different than escrow during the process of buying a home. These accounts are for current homeowners to hold property taxes and insurance premiums
Your mortgage lender manages your escrow account. Typically, your monthly mortgage payment will include your monthly principal, interest, taxes, and insurance (PITI). The portion paid for taxes and insurance is held in an escrow account until the annual fees are due. Your lender receives a copy of those bills and makes payments from the money in your escrow account.
By requiring borrowers to pay a fraction of the taxes and insurance each month, mortgage lenders minimize the risk that the homeowner will fall behind or be late on annual payments.
Because property taxes and insurance can change year-to-year, your mortgage lender will review any changes to these fees, and adjust your monthly mortgage payment as necessary to ensure enough money is in escrow.
Most lenders will also require that you keep a minimum balance (typically about two months of escrow payments) in your escrow account in the case of unexpected increases.
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