Buying a new home is exciting, but since it’s also the biggest purchase you’ll likely make, it can come with stress and uncertainty, especially when there’s so much money on the line. That’s where escrow comes in. An escrow account acts as a neutral third party to ensure a smooth and secure transaction for both the buyer and seller.
Escrow protects both buyers and sellers by holding funds and documents until certain conditions are met.
Jump to insightYour post-purchase escrow balance is put toward homeowners insurance premiums and property taxes on your behalf.
Jump to insightEscrow fees vary depending on where you live and your home’s purchase price.
Jump to insightHow does an escrow account work?
Escrow accounts, sometimes called trust accounts or impound accounts, are a type of prepayment account. They can be used for different purposes, but most people encounter them when a mortgage lender collects funds for monthly house payments. While they work sort of like savings accounts, they’re typically managed by mortgage servicers and they don’t earn interest.
Escrow accounts protect both buyers and sellers during the homebuying process. They’re most commonly used to hold funds intended to pay taxes, insurance premiums and related expenses. Having an escrow account for taxes and insurance can help you avoid a large, unexpected bill at the end of the year.
What does it mean to be in escrow?
To be “in escrow” means that money or property is temporarily controlled by a neutral third party until a specified condition has been fulfilled, such as the closing of a deed.
Hayllens, a reviewer from California, was happy with how their escrow account was managed.
“As I went through escrow, I was assigned to a specialist for each stage,” Hayllens said. “I felt I had a whole team helping me through my first home.”
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Types of escrow accounts
There are two primary types of escrow accounts: pre-purchase and post-purchase.
Pre-purchase escrow
Pre-purchase escrow accounts are for earnest money. Earnest money is typically 1% to 3% of the home price, and it shows the seller you’re serious about the purchase. This money goes toward the down payment after purchase, but it’s not always refunded if the sale falls through.
Post-purchase escrow
Post-purchase escrow accounts are for taxes and insurance payments. Your monthly mortgage statement will show an escrow line, which represents a portion of your estimated yearly insurance and tax expenses.
The amount may change yearly, and it’s estimated by your lender based on the previous year's expenses plus two additional months. If you owe more than you’ve saved, you must pay the difference. If you put more in escrow than you end up needing, you get a refund.
Common escrow terms to know
Some common terms associated with escrow include:
- Escrow advance: An escrow advance is any money put toward taxes or insurance premiums.
- Escrow agent: An escrow agent is a third party (a person or an entity) that holds and manages assets, money and documents until a transaction is finalized.
- Escrow balance: An escrow balance is the amount in your escrow account at any given time to cover taxes and premiums.
- Close of escrow: The close of escrow is when documents and payments are finalized.
- Escrow disbursement: An escrow disbursement is when the funds are used to pay for charges and expenses.
- Earnest money: Earnest money is a good faith deposit from the buyer to the seller.
How much are escrow fees?
Escrow fees can vary depending on the state you’re in, your home’s price and the chosen escrow company.
“Escrow fees are related to the fee the chosen escrow company is charging to handle the escrow,” said Ken Sisson, a California real estate agent and associate broker with Coldwell Banker Realty. “They can vary, but usually you’ll see a flat rate fee in the $500 to $1,000 range, plus a cost of around $1.50 to $2 per thousand dollars of the price of the home.”
Escrow fees example
For example, a $500,000 home for sale could have the following escrow fees:
| Flat fees | $1,000 |
|---|---|
| Additional fees | $1,000 ([$500,000 / $1,000] x $2) |
| Total fees | $2,000 |
Escrow fees vs. attorney fees
Attorney states require an attorney to be present at the signing of the legal loan documents.
“If you’re located in an attorney state, you’ll have attorney fees in lieu of escrow fees,” said Sisson.
Some attorney states are Connecticut, Delaware, Georgia, Massachusetts and South Carolina.
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FAQ
How long does it take to close escrow?
In most cases, you’ll close escrow on the same day you finalize and close on the home purchase. Most escrows close in 30 to 45 days, though some transactions may only take a week. The time it takes for your escrow to close will depend on your lender and how complicated your homebuying process is.
What are the benefits of escrow?
Escrow during the homebuying process is a protection for the buyer, seller and lender alike. The down payment is safe with a third-party account, so there are no last-minute financial surprises at closing. Pre-purchase escrow is meant to help buyers show sellers that they are serious about the transaction. Post-purchase escrow helps homeowners set aside money for their insurance premiums and taxes.
What doesn’t an escrow account cover?
Your escrow account won’t cover utility bills, homeowners association (HOA) fees or any additional bills from your local government.
Are escrow accounts required?
Post-purchase escrow accounts may be required depending on the lender or state.
“It’s usually seen as a matter of convenience and budgeting, but sometimes escrows are required depending on lender guidelines and rules associated with a homebuyer making less than a 20% down payment,” said Ken Sisson.
Bottom line
Escrow may seem like an added complication to the homebuying process, but it can provide valuable protection and peace of mind to both buyers and sellers. After you buy your dream home, an escrow account can make taxes and homeowners insurance easier to manage financially.
Article sources
ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. Specific sources for this article include:
- Consumer Financial Protection Bureau, “What Is an Escrow or Impound Account?” Accessed May 21, 2026.
- Consumer Financial Protection Bureau, “§ 1024.17 Escrow Accounts.” Accessed May 21, 2026.
- National Notary Association, “Signing Agent State Restrictions.” Accessed May 21, 2026.
