Reviewed by the Sky Escrow team, a California DFPI-licensed escrow company serving Los Angeles County.
Last updated: August 25, 2026
An escrow account is money or documents held by a neutral third party until specific conditions are met. In real estate, the term actually describes two different things: a temporary transactional escrow account that holds funds during a home purchase, and an ongoing mortgage escrow account your loan servicer uses afterward to pay property taxes and insurance.
What Is an Escrow Account?
An escrow account is a secure, neutral holding account managed by a third party — not the buyer, seller, or lender — until the parties involved satisfy a set of agreed conditions. Because escrow accounts show up at two separate stages of homeownership, with two different purposes, confusing them is one of the most common mix-ups homebuyers run into.
The first stage is the escrow period that runs between an accepted offer and the closing of a real estate transaction. The second stage begins after closing, when a mortgage servicer sets up its own account to collect and pay property-related bills on your behalf. Both use the word “escrow,” and both hold money on someone else’s behalf, but they don’t overlap in time, purpose, or who manages them.
Two Types of Escrow Accounts: Transactional vs. Mortgage
Understanding the difference between these two types of escrow accounts is the single most useful thing a homebuyer can take from this page.
Transactional Escrow Account (Used During a Purchase)
A transactional escrow account is opened when a purchase agreement is signed and closes once the sale is complete — typically a matter of weeks. What is escrow? It holds the buyer’s earnest money deposit, and later the buyer’s down payment and closing funds, along with the signed escrow instructions that tell the escrow holder exactly when and how to release everything. Once the sale records, this account is closed out and disbursed — it does not continue on.
Mortgage Escrow Account (Used After You Own the Home)
A mortgage escrow account — also called an impound account — is opened by your loan servicer at (or shortly after) closing and stays open for as long as the servicer requires it, often the life of the loan. Each month, a portion of your mortgage payment is deposited into this account, and the servicer draws from it to pay your property tax installments and homeowners insurance premiums when they come due. It has nothing to do with the transaction that already closed; it’s a recurring bill-management tool tied to your mortgage.
Types of Escrow Accounts at a Glance
| Feature | Transactional Escrow Account | Mortgage (Impound) Escrow Account |
|---|---|---|
| When it exists | From accepted offer to close of sale | From closing onward, often for the loan’s duration |
| Who manages it | A licensed escrow company or escrow officer | Your mortgage loan servicer |
| What it holds | earnest money deposit, down payment, closing funds | A portion of each monthly mortgage payment |
| What it pays for | The purchase itself — sellers, lienholders, fees | Property taxes and homeowners insurance premiums |
| How long it lasts | Weeks (one transaction) | Years (ongoing, tied to the loan) |
How a Transactional Escrow Account Works
Once escrow opens, the buyer’s earnest money deposit is wired or deposited into the escrow holder’s trust account. As the transaction moves forward, the buyer’s down payment and the lender’s loan proceeds are added to that same account. The escrow holder — never the buyer, seller, or agent directly — releases funds only according to the signed escrow instructions and only once every condition (clear title, satisfied contingencies, recorded documents) has been met. In practice, this is also where delays tend to show up: a missing signature, an unresolved title issue, or loan documents arriving late from the lender can all hold up disbursement even after both parties are ready to close.
How a Mortgage Escrow (Impound) Account Works
After closing, many lenders require an impound account, particularly on loans with less than 20% down or certain loan programs. Your servicer estimates your annual property tax and insurance costs, divides that total across twelve months, and adds it to your principal-and-interest payment. Once a year, the servicer performs an escrow analysis to compare what it collected against what it actually paid out, and adjusts your payment up or down accordingly. This account is federally regulated under the Real Estate Settlement Procedures Act (RESPA), which caps how large a cushion a servicer can hold and requires an annual statement showing every deposit and disbursement. What is RESPA?
Escrow Accounts in California: What’s Different
California adds a few state-specific wrinkles to both types of escrow accounts. Independent escrow companies that handle transactional escrow funds — like the trust account used during a home purchase — are licensed and regulated by the California Department of Financial Protection and Innovation (DFPI) under the California Escrow Law, which sets rules for how client trust funds must be held and accounted for. California DFPI escrow company licensing
On the mortgage side, California Civil Code Section 2954.8 generally requires lenders to pay interest on impound account balances for owner-occupied one-to-four-unit residential properties, though some federally chartered lenders are exempt from this requirement. California Civil Code Section 2954.8 on impound account interest If your loan servicer isn’t crediting interest on your impound balance, it’s worth asking whether the loan qualifies under this rule.
Frequently Asked Questions
What is an escrow account?
An escrow account is money or documents held by a neutral third party — not the buyer, seller, or lender — until agreed-upon conditions are satisfied. In real estate, this can refer either to the temporary account used during a home purchase or to the ongoing account a mortgage servicer maintains afterward.
What’s the difference between a transactional escrow account and a mortgage escrow account?
A transactional escrow account is opened for a single home purchase and closes once the sale records, typically within weeks. A mortgage escrow account is opened by your loan servicer at closing and stays open for years, collecting monthly payments to cover property taxes and insurance.
Do I have to have a mortgage escrow account?
Many loans require one, especially those with less than 20% down or certain government-backed programs. Some conventional borrowers with sufficient equity can request a waiver, though the servicer may charge a fee or rate adjustment for waiving it.
What happens to my escrow account after closing?
The transactional escrow account used to purchase the home is closed and its funds disbursed at recording — it does not continue. Any escrow account you have going forward is the separate mortgage escrow (impound) account your servicer opens to manage your ongoing tax and insurance payments.
Does a mortgage escrow account earn interest?
In California, many lenders are required to pay interest on impound account balances under state law, though exemptions apply depending on how the lender is chartered. Check your annual escrow statement or ask your servicer directly to confirm how your account is treated.
Sky Escrow, Inc.
15760 Ventura Blvd, Suite 1050, Encino, CA 91436
Phone: (818) 712-0000 / (888) 891-0002
Email: info@skyescrow.com
Licensed by the California Department of Financial Protection and Innovation (DFPI). License No. 96DBO-214073. License status: Active.
This article is for general informational purposes and is not legal, financial, or tax advice.
If you’re not sure whether a fee, a document request, or an account balance you’re seeing relates to your transactional escrow or your mortgage servicer’s impound account, ask which one it is before assuming — they’re managed by different parties for different reasons. For questions about opening or managing an escrow account on a purchase in the Los Angeles area, the Sky Escrow team is available to walk through what’s involved. What is an escrow company?