What Does Escrow Mean?

The word "escrow" comes from the Old French word escroue, meaning a scroll or a deed held by a third party. In real estate, escrow is simple in concept: a neutral third party holds money, documents, or property until all conditions of a transaction are satisfied. Only then does the money or property change hands.

Think of escrow as a safety deposit box with two keys. The buyer puts money in. The seller puts the deed in. Neither side can open the box alone — the escrow agent only releases the contents when both parties have met their obligations.

In Massachusetts real estate, escrow comes into play at two distinct stages: during the transaction (when your earnest money is held) and after closing (when your lender manages an account for property taxes and insurance). Understanding both is essential.

Escrow During the Transaction: Your Earnest Money

When you make an offer on a home in Massachusetts, you include an earnest money deposit — a good-faith payment showing the seller you are serious. That money does not go to the seller directly. It goes into an escrow account held by a neutral third party.

In Massachusetts, the escrow agent is typically one of the following:

• The listing broker's escrow account, regulated by the Massachusetts Real Estate Board
• The seller's attorney's Interest on Lawyers' Trust Account (IOLTA), regulated by the Board of Bar Overseers
• In some cases, the buyer's attorney's trust account

The funds remain in escrow until one of three things happens: the deal closes and the money is applied as a credit toward your purchase, the deal falls through under a valid contingency and the money is returned to you, or the buyer defaults and the money is released to the seller. In every case, both parties must sign a release before the escrow agent can disburse the funds.

The Escrow Timeline in a Massachusetts Transaction

Here is how escrow works step by step in a typical Massachusetts home purchase:

Escrow After Closing: Your Property Tax and Insurance Account

The second type of escrow begins after you close. Most mortgage lenders in Massachusetts require borrowers to maintain an escrow account (also called an impound account) for property taxes and homeowners insurance. This is a completely separate arrangement from the transaction escrow described above.

Here is how it works:

• Your lender estimates your annual property taxes and homeowners insurance premiums.
• They divide the total by 12 and add that amount to your monthly mortgage payment.
• Each month, the lender deposits the escrow portion into a dedicated account.
• When your tax bill or insurance premium is due, the lender pays it directly from the escrow account.
• You receive an annual escrow analysis statement showing all deposits and payments.

The Annual Escrow Analysis: Why Your Payment Changes

Every year, your lender conducts an escrow analysis — a review of your escrow account to compare projected tax and insurance costs with what was actually paid. This is why your monthly mortgage payment can change from year to year, even if you have a fixed-rate mortgage.

On the North Shore, property tax bills typically go out twice a year (in most Essex County municipalities). If your town reassesses property values or overrides the Proposition 2½ cap — as several North Shore communities have done in recent years — your tax bill can rise significantly, and your escrow payment will increase accordingly.

If the analysis shows a shortage (your escrow account does not have enough to cover the next year's bills), the lender will typically offer to spread the repayment over 12 months. If there is a surplus of more than $50, the lender must refund the excess. For more on how property taxes work on the North Shore, read our property tax exemptions guide.

Can You Waive Escrow After Closing?

If you have a conventional loan and have built up at least 20 percent equity in your home, you can request to cancel your escrow account. You would then pay your property taxes and homeowners insurance directly, rather than through your lender. This gives you more control over your cash flow — but also more responsibility.

Some lenders charge a fee to waive escrow (typically 0.25% of the loan amount at origination, or a flat fee at the time of cancellation). And some loan types do not allow you to waive escrow at all:

• FHA loans require escrow for the life of the loan.
• VA loans generally require escrow for at least the first several years.
• USDA loans require escrow for the life of the loan.
• Some conventional loans with lender-paid mortgage insurance may require escrow even above 20% equity.

For most homeowners, keeping the escrow account is the simpler choice. It eliminates the risk of forgetting to pay a tax bill and facing a lien. But if you prefer to manage your own money and earn interest on the funds, waiving escrow can make sense — provided you are disciplined about saving for tax and insurance bills. If you are weighing whether PMI applies to your situation, read our PMI guide.

Escrow vs. Earnest Money: What Is the Difference?

These terms are often confused, but they are not the same thing. Earnest money is the actual money you deposit. Escrow is the mechanism that holds it. You could say your earnest money is "in escrow" — meaning it is being held by the escrow agent. The earnest money is the what; escrow is the how.

What Happens at Closing with Escrow?

On closing day in Massachusetts, the closing attorney handles the final settlement escrow. Here is what happens:

1. The buyer brings the remaining funds (down payment minus earnest money, plus closing costs) to closing, typically via wire transfer.
2. The closing attorney receives the buyer's funds and the lender's mortgage proceeds.
3. The attorney pays off the seller's existing mortgage, if any.
4. The attorney records the new deed and mortgage with the county Registry of Deeds.
5. The seller receives the net proceeds.
6. The buyer receives the keys.

The earnest money that was held in escrow during the transaction is applied as a credit — it reduces the amount of cash the buyer needs to bring to closing. For a full walkthrough, read our closing day guide.

Kathleen's Take

The most common question I get about escrow is: "Why did my mortgage payment go up if I have a fixed rate?" The answer is almost always the escrow analysis. Your principal and interest payment does not change on a fixed-rate loan — but your property taxes and insurance premiums do. When Essex County towns reassess or insurance rates rise, your escrow payment adjusts. I always tell buyers to budget for a small increase each year, even with a fixed-rate mortgage. And if you are considering waiving escrow, make sure you are the type of person who will actually save for those biannual tax bills. The town does not send reminders — they send liens.