Definition
Escrow is a legal arrangement where a third party holds money or assets on behalf of two other parties until specific conditions are met. In real estate, escrow refers to the period between when an offer is accepted and closing, when a neutral third party holds the earnest money and facilitates the transaction. For mortgages, an escrow account is used to collect and pay property taxes and insurance premiums on behalf of the homeowner.
Example
Mortgage Escrow Example
If your annual property taxes are $3,600 and your homeowners insurance is $1,200 per year, your lender may collect an additional $400 per month ($3,600 + $1,200 = $4,800 ÷ 12) into an escrow account. When tax and insurance bills come due, the lender pays them from this account, ensuring these critical bills are paid on time and protecting the lender's collateral.