Understanding Escrow

When we talk about escrow as it relates to mortgages and real estate we are actually talking about two different topics that concern home buyers:  the closing of the sale on a house (referred to as escrow) and the mortgage escrow account (a fund set aside for on-going expenses while the lender holds the note on your house).  Let's take a brief look at both of these concepts so you can be better prepared when you decide to buy your first home and take on a mortgage.

Escrow
Buying a house is not a simple procedure.  With very few exceptions, it will be the largest financial decision you will ever make and will mean that you have an obligation to your lender for many years to come to pay down your mortgage note.  It is important that when you purchase a house that certain procedures, rules and paperwork be followed and signed.  In almost all real estate transactions you will be dealing with a neutral third-party called the escrow holder (or escrow agent).  The purpose of the escrow holder is to make sure that everything is in order so that all parties involved follow the rules and are protected.

An escrow holder will make sure that all documents are received and filed.  They will also insure that all stipulations in the buying and selling agreement are met before the sale of the home is finalized.  They will request a title search to make sure the home is free and clear of any liens.  They are in charge of receiving the funds from the buyer and releasing them to the seller only when the sale has been finalized.

An escrow agent will never give advice to either party.  They are to remain neutral.  If you suspect that your escrow agent is not being neutral you should immediately inform your mortgage lender and realtor.  They also will not offer tax advice or opinions on your mortgage.  Again, they are there to make sure all the t's are crossed and I's are dotted - they are not there to get involved personally in any way.

Escrow Account
The second topic is escrow accounts.  You can think of these as "home bank account" in some ways, even though it is not a typical bank account.  Escrow accounts are used to fund certain on-going payments that must be made over the life of the loan.  Such items that have on-going payments include property taxes, insurance and mortgage insurance. 

Escrow accounts are usually partially funded at closing and then a certain amount from each month's mortgage payment is directed to the escrow account.  When items come due, the escrow account is used to make payments on behalf of the mortgage holder. 
It is important to note that not all mortgages have escrow accounts.  If they are needed for your loan they will be disclosed to you when your mortgage lender prepares the documents and terms of your loan.