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What Is Escrow?

Key Takeaways

  • An escrow account can be used to facilitate any large or complicated transaction.
  • Escrow is a neutrally managed place where all involved parties can safely park their money.
  • An escrow account is often used while closing on a home. Afterwards, your lender might set up an escrow account for you where you can pay your mortgage, taxes and insurance.

Escrow is an account managed by a neutral, third-party company that makes sure a transaction is handled smoothly and fairly. You’ll hear the term escrow thrown around a lot when you’re a homeowner or in the process of buying a home. Essentially escrow is a safe place where all involved parties can park their money until a transaction is complete.

Escrow for the home buying process

Buying a home involves a lot of moving pieces, mounting anxieties, and hefty financial transactions. At times you may wonder:

  • What if the house doesn’t pass inspection?
  • What if you want to change the terms of the offer or back out completely? Do you get your money back? What if they refuse?
  • What if the process is taking longer than expected?

The answer to all this uncertainty is escrow. No one gets paid until everyone is in agreement and the escrow account is closed.

How escrow works

Funds are held by an escrow company — a neutral third party who has no ties to the partners involved. The escrow company will keep track of who’s doing what, and when they have to do it, in order to close the escrow on time. For example, if the goal is to close on the house in 60 days, the escrow agent will make sure everyone can deliver what they promised by day 60.

Funds or assets that typically go into an escrow account include:

Escrow for current homeowners

After closing, chances are you’ll soon be dealing with a new escrow account. Typically your lender might set up an escrow account to handle your taxes and insurance. This way your mortgage payment, taxes and insurance are rolled up into one easy payment. It’s an easy way for you to manage your bills and also acts as a safe-guard for the lender to ensure your taxes and insurance are paid on time, and in full.

Your escrow payment is based on your annual insurance premium and estimated property tax, split into 12 equal amounts. The monthly amount may change year to year based on any changes in your insurance premium or taxes.

The lender uses the money held in escrow to pay the appropriate companies when the bills are due.

If your down payment is 20% or more, your lender may waive the escrow requirement at your request. You would be responsible for making the insurance and tax payments.

What to remember

The home buying process can be extremely confusing. Imagine life before escrow! The rise of escrow in the industry has added more transparency into the home buying process. It holds everyone involved accountable to what was promised. Buying a home is one of the most important and complicated purchases of your life, so in a way, escrow makes your life a lot easier.

More information

We are committed to helping you reach your potential by providing personalized solutions. Our dedicated colleagues can help you find the right product to help you reach your goals. To learn more about mortgage solutions, please call 1-888-514-2300, visit us here, or find a loan officer.

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