How to understand the real estate escrow account?


A real estate escrow account is opened at the time of a home buying transaction. The term escrow is used to denote funds, documents or asset held at an independent third party until the transaction completes.

The earnest money deposit will be held in escrow until the purchase transaction closes, or fails to close (in which case most often earnest money is not reimbursed back). The person handling the escrow while a transaction closes is called an escrow officer or agent.

Real Estate Escrow Account

Your lender will open a real estate escrow account at closing and you will have to fund the annual escrow amount upfront. When making your PITI payment (Principal, Interest, Tax, Insurance), the tax and insurance part will go to your real estate escrow account, held by the lender. Even though tax and insurance are usually paid on an annual or bi-annual basis, you will have this payment spread in even parts and applied to your mortgage monthly payment.

Lenders will usually require an extra amount held at the escrow account. This so called cushion cannot exceed a two-month escrow payment. Also, even though the Real Estate Settlement Procedures Act (RESPA) does not require that lenders pay interest on escrow account much as they pay interest on savings accounts, escrow interest may be required by some states.

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