"Escrow" actually refers to two related but different things in a home purchase: a neutral third party holding money or documents during your transaction, and an ongoing account your mortgage servicer uses afterward to pay your property taxes and insurance. Both exist for the same reason — to make sure money changes hands safely, at the right time, without either party having to just trust the other.
Escrow during the purchase (the transaction)
When you go under contract on a home, your earnest money deposit is typically held by a neutral third party — often a title company, escrow company, or attorney, depending on the state — rather than paid directly to the seller. This "escrow holder" keeps the funds until closing, then disburses them according to the contract: applied toward your down payment and closing costs if the sale closes, or returned to you if you cancel within a valid contingency period.
The same escrow process also manages other closing logistics: collecting loan funds from your lender, prorating taxes and HOA dues between buyer and seller, and making sure the title transfers only once every condition of the contract has been satisfied.
Escrow after closing (your mortgage)
Once you own the home, "escrow" usually refers to something different: an account your mortgage servicer maintains on your behalf. Part of your monthly mortgage payment goes into this account, and the servicer uses it to pay your property tax and homeowners insurance bills for you when they come due — so you're not stuck finding a lump sum once or twice a year for those bills.
This is why your monthly "mortgage payment" is often larger than just principal and interest — it includes this escrow contribution (sometimes referred to as the "T&I" or "impound" portion). Your servicer will occasionally send an escrow analysis, adjusting your monthly amount up or down as tax and insurance costs change.
Quick way to keep the two straight: transaction escrow is temporary and ends at closing. Mortgage escrow is ongoing and continues for as long as you have that account set up with your loan.
This page is for general educational purposes. Escrow processes and requirements vary by state and lender — confirm specifics with your title/escrow company and mortgage servicer.
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