What Is Escrow In Your Mortgage?
Escrow takes care of taxes and insurance.
Published Tuesday, May 27, 2025 to Advice
Picture this: you just bought a home. Your mortgage is finalized and you’re wondering how your monthly payment is calculated.
It’s easy, right? Principal balance plus interest over a set period of time?
Well, if you already own a home, you know it’s not quite that simple. There’s one more piece to the puzzle: escrow.
And now you’re probably asking the age-old question: “What is escrow?”
Escrow may sound like a stuffy financial word but, really, it’s a pretty simple concept. Let’s explore the definition of escrow and how it factors into the homebuying process and your mortgage.
Still early in your research? Check out our First-Time Homebuyers Guide.
What is Escrow Used For In Your Mortgage?
Escrow has three primary purposes across the homebuying and homeownership processes.
Escrow During the Home Sale and Purchase Process
During the homebuying process, an escrow account holds onto a deposit paid by the buyer, also known as “earnest money”. This deposit shows that the buyer is serious about buying the home.
However, Veridian’s field of membership – Iowa, Nebraska and Minnesota – does not use escrow accounts for this purpose. More details about this are included below.
Escrow For Homeowners
For a homeowner, escrow is used to pay your property taxes and your monthly homeowner’s insurance premium. If you have private mortgage insurance, escrow may be used to pay your monthly premium as well.
In some cases, other types of insurance, like flood insurance, may be covered by escrow as well.
How Escrow Works During the Purchase Process
When you’re serious about buying a home, you will pay a deposit to show your good faith. This is sometimes called “earnest money” and is typically 1% - 3% of the sale price.
A third-party escrow agent holds onto this deposit during the final stages of the sale. During this time, you could have inspections completed, finalize your mortgage and ensure that the title is free and clear.
Once the sale is complete, the escrow agent will transfer the money to the seller. But if the deal falls through, you may get your deposit back.
Whether or not you get your deposit back would depend on the reason for the deal falling through. If you back out of the purchase on your own terms, you may forfeit your deposit to the seller.
The way this is handled varies from state to state. For example, in Veridian’s field of membership – Iowa, Nebraska and Minnesota, this money is not held in an escrow account.
How Escrow Works for Homeowners
During the sale process, it will depend on your local regulations. The deposit amount for escrow is typically between 1% - 3%.
For tax and insurance purposes, escrow will usually be factored into your mortgage. Each month, your mortgage payment will cover the following:
- An extra amount to cover your property taxes.
- Your premiums for homeowner’s insurance, mortgage insurance, flood insurance, etc.
Your lender will automatically put the extra amount in a separate escrow account. Then they will pay your property tax bill and any applicable mortgage insurance premiums when those bills are due.
How Escrow Is Calculated in Your Mortgage
Your lender or escrow agent will handle the calculation for you.
For private mortgage insurance, it will simply be the cost of your monthly premium. But for property taxes, it’s a bit more complicated than that.
The amount you pay into escrow for property taxes will depend on several factors, including:
- Your home’s current value.
- The tax environment in your area.
- The tax bill history for your home.
Who Manages Escrow Accounts?
If you’re a homeowner, your escrow account will most likely be managed by your mortgage lender. They will collect your escrow contributions from your mortgage payment and use the funds to pay taxes and mortgage insurance premiums.
If you’re buying a home and put down “earnest money”, the escrow account will be managed by a third-party escrow agent.
Some escrow agents may charge administrative fees to cover their overhead costs. Most mortgage lenders, however, do not charge fees for escrow accounts.
At Veridian, there are no fees for escrow.
Veridian – For All Your Mortgage Needs
At Veridian Credit Union, we want to make the mortgage process as easy as possible. That includes managing your escrow account.
We would love the opportunity to help you with the financial side of buying your next home. Or, if you’re already a homeowner, let’s see if we can help you save by refinancing with us.