Escrow is a legal arrangement in which a third party temporarily holds money or property until a particular condition has been met, such as the fulfillment of a purchase agreement. In real estate transactions, escrow is used to protect both the buyer and the seller throughout the home buying process. An escrow account is typically used for two reasons in real estate:

• To protect the buyer’s good faith deposit so the money goes to the right party according to the conditions of the sale.
• To hold a homeowner’s funds for property taxes and homeowners insurance.

There are two types of escrow accounts used for real estate transactions:

• Homebuyers escrow: An account used to hold earnest money on behalf of the homebuyer and seller.
• Homeowners escrow: An account used to hold a portion of monthly mortgage payments on behalf of the homeowner and lender.

When you close on a mortgage, your lender may set up a mortgage escrow account where part of your monthly loan payment is deposited to cover some of the costs associated with homeownership, such as real estate taxes, insurance premiums, and private mortgage insurance. The lender deposits the escrow portion of your mortgage payment into the account and pays your insurance premiums and real estate taxes when they are due.