What Is an Escrow Account? The Two Kinds Explained

"Escrow" confuses people for a simple reason: it means two different things in real estate. One holds your deposit while a sale comes together; the other handles your taxes and insurance after you own the home. Here's how both work.

Key Takeaways

• Purchase escrow is a neutral third party holding your earnest money and documents until closing.
• Mortgage escrow (an impound account) collects part of your payment to pay property taxes and insurance.
• Earnest money is commonly 1% to 3% of the purchase price (Rocket Mortgage, NAR).
• Federal rules cap the mortgage escrow cushion at about two months of payments (12 CFR 1024.17).

Meaning 1: escrow during a purchase

When your offer is accepted, you put down earnest money to show you're serious. That money doesn't go to the seller; it goes into escrow, held by a neutral third party until closing (CFPB). In Florida that's usually a title company, a real estate attorney, or the broker's trust account. The deposit is commonly 1% to 3% of the price, higher in competitive markets, and it's applied to your down payment or closing costs at the end, when the deed transfers title to you (Rocket Mortgage; NAR). Florida brokers must place deposits in escrow within three business days (Florida Realtors).

Meaning 2: a mortgage escrow account

The second kind shows up after you own the home. A mortgage escrow, or impound, account lets your lender collect roughly one-twelfth of your annual property taxes and homeowners insurance with each monthly payment, then pay those bills when they come due (CFPB). It spreads two big annual expenses into manageable monthly amounts and makes sure they get paid on time, which protects both you and the lender.

How the escrow math works

Federal rules keep mortgage escrow in check. Your servicer can collect up to one-twelfth of expected annual costs each month, plus a cushion of no more than one-sixth, about two months' worth (12 CFR 1024.17). Once a year the servicer runs an escrow analysis. If your taxes or insurance rose, you may face a shortage and a higher payment; if it over-collected, a surplus over $50 must be refunded within 30 days (CFPB).

Is escrow required?

It depends on the loan. FHA loans require escrow; conventional loans often let you waive it once you have enough equity (commonly 20% down), though some lenders charge for the waiver. Many buyers keep escrow anyway, for the convenience of not having to budget for a big tax bill on their own.

Have questions about earnest money, escrow, or closing in South Florida? Pure Equity Realty will walk you through every step. Talk to an agent.

Frequently asked questions

What is an escrow account?

It's an account that holds funds on behalf of two parties. In a purchase, escrow holds your earnest money until closing; with a mortgage, an escrow account collects part of your payment to pay property taxes and insurance (CFPB).

How much earnest money goes into escrow?

Commonly 1% to 3% of the purchase price, and higher in competitive markets (Rocket Mortgage, NAR). It's held by a neutral party and applied to your down payment or closing costs at closing.

Can I avoid a mortgage escrow account?

Sometimes. FHA loans require escrow, but conventional lenders often allow a waiver once you have sufficient equity, usually around 20% down. Some lenders charge a fee to waive it, and many buyers keep it for convenience.

What happens if my escrow account is short?

If taxes or insurance rise, your servicer's annual analysis may show a shortage, and your monthly payment goes up to cover it. If the account over-collected, a surplus over $50 must be refunded within 30 days (12 CFR 1024.17).

Sources

• Consumer Financial Protection Bureau (escrow/impound accounts); 12 CFR 1024.17 (RESPA escrow rules).
• Florida Realtors (broker escrow rules); Rocket Mortgage and NAR (earnest money).

Published June 19, 2026. General information, not financial advice; confirm specifics with your lender and closing agent.