What Is Escrow?

Short answer

Escrow is money held by a neutral third party until conditions are met. In a Miami purchase it means two things: the title company or attorney holding your earnest money deposit until closing, and the escrow account your mortgage servicer uses to collect roughly one twelfth of your annual property taxes and insurance each month and pay those bills when due.

Definition

An escrow account is a holding account managed by a neutral party. Before closing it protects the buyer's deposit; after closing it is how the lender makes sure property taxes and insurance get paid on time.

Worked example

Annual property taxes $8,400 and homeowners plus windstorm insurance $5,400. Monthly escrow = ($8,400 + $5,400) / 12 = $1,150, added to your principal and interest. At closing the lender also collects an initial deposit, often two to three months of each item as a cushion: 3 x ($700 + $450) = $3,450. The following year taxes rise to $9,000, so the servicer recalculates: ($9,000 + $5,400) / 12 = $1,200, a $50 monthly increase, plus any shortage from the prior year spread over 12 months.

Escrow before closing

When your offer is accepted you wire an earnest money deposit, often 5% to 10% in Miami contracts, to the escrow agent named in the contract (title company or closing attorney). It stays there until closing, when it is credited toward your down payment. If you cancel within your inspection or financing contingency, the deposit is returned; if you default, the seller may keep it. Always confirm wiring instructions by phone before sending money.

Escrow after closing

Your servicer collects taxes and insurance monthly, pays the bills, and sends an annual escrow analysis. Payments go up or down when taxes or premiums change.

• Escrow is required on FHA and VA loans and on most high-LTV conventional loans.
• With 20% or more down on a conventional loan you can often waive escrow, sometimes for a small pricing adjustment.
• HOA dues are never escrowed; you pay the association directly.

In South Florida

Escrow shortages are a South Florida specialty. Property taxes reset to your purchase price the year after you buy, so a first-year escrow based on the seller's homesteaded tax bill can be thousands short. Insurance premiums have also risen sharply in Miami-Dade. Ask your loan officer to estimate taxes on the purchase price and to use a real insurance quote with windstorm and flood. Florida tax bills come out in November with a 4% discount for paying that month; a good servicer pays early to capture it.