The Different Types of Escrow Accounts

Mortgage 101
Here’s a rundown of the different types of escrow accounts, what they do and how they will be used in your purchase or refinance.
Published on
August 17, 2023
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If you’re planning on buying a home or refinancing your existing home, it’s important to understand the different types of escrow accounts. Escrow accounts can be used in different ways depending on whether you are buying or refinancing a home. They are also used by lenders when they make loans to homeowners either for home purchases or for investment properties.

What are escrow accounts

Escrow accounts are a specific type of bank account that's used to hold money for a particular purpose. For example, escrow accounts are commonly used in the real estate industry as part of the home buying process. When you buy a home, your lender will deposit a portion of your closing funds into an escrow account to pay taxes and insurance on behalf of the homeowner until you move in (or otherwise take ownership).

Homeowners can also set up escrow accounts with their lenders for other purposes, such as saving for eventual repairs or maintenance projects. While these types of savings plans aren't necessarily mandatory, they can help homeowners avoid unpleasant surprises down the road if they've been diligent about planning ahead!

Basic escrow account

A basic escrow account is a type of impound account used to collect and hold funds for taxes, insurance premiums and homeowner association dues. These are not used to pay any other types of expenses.

For example: suppose you have a $1,000 mortgage payment due on the first day of each month, but your taxes are due on the 15th and your insurance premium is due on the 30th. If this is an all-cash transaction where none of these payments can be paid electronically (debit card or credit card), then you should set up an impound account that collects your mortgage payment every month and pays it as soon as possible after receiving it. This ensures that no part of any one payment will go uncollected in case something unexpected happens with one or more bills being paid by check instead of electronic transfer from your bank account into theirs.

Impound account

An impound account can be a savings account where your monthly mortgage payment is deposited. The money in this account is used to pay property taxes and insurance on the home, so it's important that this fund have at least enough money to cover these costs. Typically, lenders will require that the amount be equal to or greater than what's owed monthly for taxes and insurance. This makes sense because if a homeowner couldn't make their mortgage payments for some reason (such as losing a job), it would be easier for them to take care of these expenses with the money already in an impound account rather than having to make new deposits each month from their checking account.

Third-party escrow account

Third-party escrow accounts are typically used when the buyer and seller are not the same person. This is common in commercial real estate transactions, where a third party is involved in a transaction between two parties who do not want to use their own funds. Third-party escrow accounts are often used in large commercial transactions, such as those that take place between real estate developers or developers and investors.

Earnest money deposit

An earnest money deposit is a payment that shows you're committed to completing the transaction and puts the seller at ease about proceeding with escrow. It's usually around 1% of the purchase price, depending on how much cash you have available.

The amount depends on each situation: some sellers may accept more than one offer, while others will only accept your bid if it includes an appropriate earnest money deposit.

You'll need to pay an earnest money deposit if:

  • You want to make sure that both parties are serious about closing the deal as planned (and not backing out).
  • You want to show your seriousness in completing this purchase and turning over ownership of your house or apartment building once closed (and not backing out).
If you’re planning on buying a home or refinancing your existing home, it’s important to understand the different types of escrow accounts.

If you are planning on buying a home or refinancing your existing home, it’s important to understand the different types of escrow accounts.

Escrow accounts are used to manage funds associated with a real estate transaction. They are set up by lenders and used in home loans, mortgages and refinancing. The type of account you have will vary based on the lender or bank that is providing it as well as what state you’re in (or where your property taxes/insurance is being managed).


There are several types of escrow accounts, and it’s important to know what each one does.

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