Escrow
Money held by a neutral third party — either during a home purchase, or by your lender to pay property taxes and insurance.
What Escrow means
Escrow describes two related things in a home transaction, and the distinction matters.
During the purchase, escrow is a neutral holding arrangement. Your earnest money deposit sits with a third party while inspections, appraisal, and financing are worked through, and is released to the seller only when the terms of the contract are satisfied. It protects both sides from the other walking away with the funds.
After closing, an escrow account is a separate matter. Your lender collects roughly one-twelfth of your annual property taxes and homeowners insurance with each mortgage payment, holds it, and pays those bills when due. That is why a quoted mortgage payment of $1,896 often shows up on your statement as $2,300.
Lenders run an annual escrow analysis. If taxes or insurance premiums rise, your monthly payment rises with them — a common surprise for first-time homeowners who assumed a fixed-rate loan meant a fixed payment.
Related terms
Amortization
The process of paying off a loan through fixed regular payments, where each payment covers interest first and the rest reduces the balance.
Principal
The original sum borrowed or invested, separate from any interest charged or earned on it.
Premium
The amount you pay an insurer — monthly, quarterly, or annually — to keep a policy in force.
Underwriting
The process a lender or insurer uses to verify your finances and decide whether to approve you, and on what terms.
Debt-to-Income Ratio (DTI)
The share of your gross monthly income that goes to debt payments — a key test lenders apply when sizing a mortgage.
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