"Escrow" is one of those words that gets used in two completely different ways in a real estate transaction — and mixing them up causes real confusion. Here’s what both types mean, and what Pennsylvania homebuyers specifically need to know about each.
Type 1: Purchase Escrow (The Earnest Money Account)
When you go under contract on a home, you typically put down earnest money — a deposit that signals you’re serious. That money doesn’t go directly to the seller. It goes into escrow, held by a neutral third party (usually a title company, settlement company, or real estate attorney) until closing.
Why it exists: Purchase escrow protects both parties. If the sale completes, the earnest money is credited toward your down payment or closing costs. If the deal falls apart, who gets the money depends on the contract terms and which party was at fault.
In Pennsylvania, the use of attorneys at closing varies by county. In some parts of the state, real estate attorneys routinely handle escrow and closing functions; in others, title companies handle it end to end. Either way, the earnest money sits in a neutral account until the transaction resolves.
Type 2: Mortgage Escrow Account (Taxes and Insurance)
Once you close, your lender will likely set up an escrow account (also called an impound account) attached to your mortgage. Each month, a portion of your mortgage payment goes into this account. The lender uses it to pay:
- Property taxes (on your behalf, to the taxing authority)
- Homeowner’s insurance (paid annually to your insurer)
- Flood insurance (if required)
This protects the lender by ensuring these obligations stay current. A home with unpaid taxes or lapsed insurance is a riskier collateral.
Pennsylvania Property Taxes: The Arrears Issue
Here’s something that surprises many PA buyers at closing: Pennsylvania property taxes are paid in arrears. That means you pay at the end of the period you occupied the property, not in advance.
At closing, you’ll typically see a tax proration on your settlement statement. The seller owes taxes for the portion of the year they owned the home before the sale — but since those taxes haven’t been paid yet, you (the buyer) collect that credit at closing and are responsible for paying the full tax bill when it comes due.
Your lender will factor the tax proration into your escrow account setup, which is why your initial escrow deposit at closing may be larger than you expect.
Annual Escrow Analysis
Once a year, your lender is required to analyze your escrow account. They look at:
- What was actually paid out (taxes and insurance)
- What your current balance is
- What the projected balance needs to be going forward
If your taxes or insurance increased, your monthly escrow payment goes up. If there’s a surplus above the allowed cushion (typically 2 months’ worth), the lender refunds it to you. Shortfalls result in either a lump-sum catch-up payment or a higher monthly payment spread over 12 months.
When Can You Waive Escrow?
Some lenders allow you to opt out of the escrow account — meaning you pay your taxes and insurance directly instead of through the lender. This is typically allowed when:
- Your loan-to-value (LTV) is 80% or lower (20%+ down payment or equity)
- Your loan type permits it (conventional; FHA and VA typically require escrow)
- You pay an escrow waiver fee (often 0.25% of the loan amount)
An escrow waiver requires discipline — you’ll need to budget for semiannual or annual tax bills that can be several thousand dollars. Some buyers prefer the forced savings mechanism of escrow; others prefer managing the cash themselves.
How to Read Your Escrow Statement
Your servicer sends an annual escrow analysis statement. Key lines to check:
- Current monthly escrow payment: What you’re paying now
- Projected low balance: The lowest the account is expected to get before the next analysis
- Required low balance: The minimum cushion (2 months’ payments) the lender requires
- New monthly payment: What changes, if anything, after the analysis
- Shortage or surplus: Whether you owe a catch-up or are getting a refund
If numbers look wrong — for example, a large spike in property taxes — verify with your local tax authority. Assessment errors do happen.
Frequently Asked Questions
Q: Does escrow earn interest in Pennsylvania? A: In Pennsylvania, lenders are not required to pay interest on mortgage escrow accounts. Some lenders do voluntarily, but it’s not the norm. If interest is offered, it’s usually minimal.
Q: What happens to my escrow account if I refinance? A: When you refinance, your old escrow account is closed and any remaining balance is refunded to you (usually within 30 days). Your new lender sets up a new escrow account at closing.
Q: Can the lender require escrow even if I put 20% down? A: On conventional loans, lenders generally cannot require escrow if you have 20%+ equity and a strong payment history, though they may charge a fee to waive it. On FHA loans, escrow is required regardless of down payment amount.
Questions about how escrow fits into your loan and closing costs? Dynamic Funding Solutions can walk you through a detailed estimate before you’re ever at the settlement table.
Call (215) 364-7171 or visit dynamicfunding.net
Lena Polnet, NMLS #17225 | Dynamic Funding Solutions, NMLS #17144 | Licensed in PA and FL. This post is for educational purposes only and does not constitute a commitment to lend.