Checking | Auto Loans | Mortgage | HELOC | Personal Loans | Credit Cards | Membership

What is an escrow account on a mortgage?

An escrow account on a mortgage holds funds that are related to the purchase transaction. In real estate, there are typically two types of escrow accounts:
  1. For holding a buyer's earnest money (good faith deposit) and other funds related to the purchase of a property.
  2. For paying property taxes and homeowners insurance after the sale has been finalized. This is called a mortgage escrow account.

At Credit Union of Southern California (CU SoCal), we make getting a mortgage easy.
Call 866.287.6225 today to schedule a no-obligation consultation and learn about our auto loans, home equity lines of credit, personal loans, checking and savings accounts, and other banking products. As a full-service financial institution, we look forward to helping you with all of your banking needs.
Read on to learn more about mortgage escrow accounts.

Get Started on Your Mortgage Today! 

What is escrow when buying a home?

When a home buyer and home seller agree on a purchase price, the buyer makes a “good faith deposit” (also known as an earnest money deposit) into an escrow account and a purchase contract is signed by both parties. The deposit is put into an account that is held by a third party (a real estate broker, title company, or attorney) until the closing date, when the deposit or escrow is released to the seller.

When do you need an escrow account?

An escrow account is important before, during, and after a home purchase/sale transaction.
1) Buying a home. As explained above, the first escrow account is established when the buyer makes a good faith deposit and signs a purchase contract. If, during the contract period, the buyer decides not to purchase the house due to a problem with the home, such as termites, the escrow may be returned if that contingency is listed in the contract. If the deal goes through, the good faith deposit is released to the seller at closing.
2) Taxes and insurance. These payments will be held by your lender in a mortgage escrow account. After the closing, the buyer will likely be required by the mortgage lender to have an escrow account from which homeowners insurance and property taxes will be paid. A portion of the monthly mortgage payment will include monies for these amounts.
You may hear your lender use the term “PITI,” which stands for Principal, Interest, Taxes, and Insurance. These are the components of your mortgage payment, along with private mortgage insurance (PMI), if you get a conventional loan with less than 20% down payment.

What is escrow on a house?

After the buyer purchases a property, the lender requires the buyer/borrower to pay money into an escrow account for payment of property taxes and homeowner insurance (which the lender or loan servicer will pay for you). This is to ensure these premiums are paid in full and on-time. Some lenders will release the escrow to the homeowner after a certain amount of time, or when the buyer has more equity in the home.

Is an escrow account necessary?

It should be noted that an earnest money deposit is not required by law, nor is it truly necessary. However, it is customary for a homebuyer to make an earnest money deposit when the seller has accepted the buyer’s offer on the property that’s for sale.
When a down payment is made on a property purchase there will be an escrow account established to hold the funds. The mortgage lender may require an escrow account when a buyer puts down less than 20% on a home purchase and if the loan is a government-insured mortgage (FHA, VA, USDA).

Who manages the escrow account?

To ensure that the money is protected, escrow accounts are always professionally managed by a trusted third party in the real estate transaction, other than the buyer and seller. This may be escrow companies and agents or mortgage servicers.
Escrow companies and agents. At the start of the real estate transaction, the good faith deposit may be held by an escrow company or agent (such as a title company).
Mortgage servicers. This is the company that services the mortgage by collecting the monthly payment and accounting for the funds. The original mortgage lender may service the loan or sell the loan to a servicing company. If your loan is sold, you will be sent a letter disclosing the sale and providing information on where to send monthly payments.

Pros and cons of escrow accounts


  • Protection for home buyers. With an escrow account holding the good faith deposit, the seller stops showing the home to other potential buyers. This protects the buyer from losing the home they want to purchase.
  • Protections for sellers. If the buyer decides no longer wants to purchase the home and the reason is not covered by any of the contingencies stated in the contract, then the buyer could lose their deposit. This protects the seller for the time and money they could lose when their house was off the market.
  • Protection for lenders. Once a property purchase closes, an escrow account that holds money for payment of property tax and homeowners insurance protects the lender in case the homeowner stops paying their mortgage. Lenders may hold six months of funds, from which they can make payments, even if the homeowner stops paying. The next step in this case would be foreclosure.


  • Higher monthly mortgage payments. Because the mortgage lender holds money for payment of property tax and homeowners insurance, this increases the monthly mortgage payment amount.
  • Inaccurate estimates. If the lender over or underestimates the amount of escrow needed for taxes and insurance, the homeowner could end up owing more money or overpaying.
  • Changes to monthly payments. Escrow will be recalculated annually, and the amount will change based on the change in annual property tax and the cost of a homeowners insurance policy. Homeowners should be prepared to pay more. However, there are times when refunds are given if the escrow account was over estimated and there is an escrow balance on the mortgage.

Expenses not covered in your escrow account

Lenders will not use a borrower’s escrow account to pay for utility bills, homeowner association (HOA) dues, or one-time tax bills or assessments.

What are escrow fees?

There are two types of escrow fees:

1) For escrow agent. The agent (third party) that holds the escrow funds before closing may charge a fee for this service. The fee will be based on the purchase price of the property.
2) For waiving escrow. Some lenders will let the homeowner “waive escrow” after 20% equity in the home is reached. However, a fee is charged to cover their risk.

How long do you make payments on your mortgage escrow account?

The length of time you’ll need to maintain an escrow account will depend on the type of mortgage loan you have and the terms of the loan. Some homeowners may need to make payments to their mortgage escrow account for the life of the loan, while others can eventually request that escrow be waived.

Why Savvy Consumers Choose CU SoCal

For over 60 years CU SoCal has been providing financial services, including car loans, mortgages, Home Equity Loans, HELOCs, personal loans, credit cards, and other banking products, to those who live, work, worship, or attend school in Orange County, Los Angeles County, Riverside County, and San Bernardino County.
Please give us a call today at 866.287.6225 today to schedule a no-obligation loan consultation with a CU SoCal Member Services specialist.

Get Started on Your Mortgage Today! 

Help + Support


Co-Browsing Code

Building Better Lives

Credit Union of Southern California (CU SoCal) is a leading financial institution empowering those who live, work, worship, or attend school in Orange County, Los Angeles County, Riverside County, and San Bernardino County to reach their goals and build strong financial futures. CU SoCal provides access to convenient money management services and offers competitive rates and flexible terms on auto loans, mortgages, and VISA credit cards—turning wishing and waiting into achieving and doing.


562.698.8326 | 866 CU SoCal Se Habla Español