What is Escrow?

An escrow account is a neutral financial repository managed by a mortgage servicer to collect, hold, and disburse funds required for property-related expenses, primarily property taxes and homeowner’s insurance premiums. In the homebuying process, escrow is also used during closing, where a neutral third party holds the buyer's earnest money and the seller's signed deed until all contractual obligations are met. Post-closing, lenders typically require a monthly mortgage escrow account to ensure that tax and insurance bills are paid on time, protecting the lender's collateral from tax foreclosures, government liens, or uninsured physical damage.

Under Section 10 of the Real Estate Settlement Procedures Act (RESPA), implemented via Regulation X (12 CFR § 1024.17), federal rules cap the amount of cash a lender can require a borrower to maintain in escrow. Lenders are permitted to maintain a safety cushion of no more than one-sixth (1/6) of the estimated total annual disbursements, which is equivalent to two months of escrow payments. Servicers must perform an annual 'escrow analysis' using aggregate accounting to evaluate the account's historical and projected activity. If this analysis reveals a surplus of $50 or more, the servicer must refund it to the borrower, whereas shortages or deficiencies can be paid in a lump sum or amortized over the next 12 months, which adjusts the borrower’s monthly payment. Some conventional borrowers with at least 20% home equity can request an escrow waiver to manage and pay these bills directly, though lenders may charge a waiver fee.