What Is Escrow and How Does It Work in Texas?

Escrow means two completely different things in a Texas home purchase, and that is the entire reason this word confuses people. Meaning one is the title company holding money for both sides during the transaction. Meaning two is the account attached to your mortgage that collects property taxes and insurance every month and pays those bills for you.

They share a name and almost nothing else. One lasts about six weeks. The other lasts as long as you own the house, and in El Paso it is often the single largest surprise in your monthly payment. Let me take them one at a time.

Escrow, Meaning One: Money Held During the Transaction

When you go under contract in Texas, you do not hand money to the seller. You hand it to a neutral third party, and in Texas that party is the title company acting as the escrow agent. Texas closings run through title companies, not attorneys, which is different from a lot of states people move here from.

The title company holds two separate pieces of money, and buyers mix them up constantly.

The option fee. In El Paso this typically runs $200 to $500. You deliver it to the escrow agent within three days of the effective date, and it buys you an unrestricted right to terminate the contract for any reason during the option period, which is usually 7 to 10 days here. That fee goes to the seller. It is not refundable, because you are literally buying the right to change your mind. The contract has a box indicating whether the option fee gets credited to your purchase price at closing. Make sure that box is checked. I have seen it left unchecked, and it is free money to give away.

The earnest money. Usually $1,000 to $3,000 in our market, though it scales with price. This one is refundable in the right circumstances. It stays with the title company, it is credited toward your cash to close at the end, and you get it back if you terminate during the option period or under a contingency the contract actually gives you. If you walk for no reason after the option period expires, that is when it is at risk.

I go into both in more detail in the earnest money guide for El Paso and the Texas option period explainer, because those two items decide how much leverage you have and how much you can lose.

The title company is doing more than holding cash. It is running the title search, clearing liens, preparing the policy that protects you from a claim on your ownership, and handling the actual disbursement of every dollar on closing day. The title, survey and closing walkthrough covers what they do and what you are paying for.

When you close, this version of escrow ends. The file is disbursed, the deed is recorded, and the title company is done with you. Then the second meaning starts.

Escrow, Meaning Two: The Account on Your Mortgage

Your mortgage payment is not just the loan. It has four parts, and lenders abbreviate them as principal, interest, taxes and insurance.

The first two go to the lender for the loan itself. The last two go into an escrow account. Every month your servicer takes roughly one twelfth of your annual property tax bill and one twelfth of your annual homeowners insurance premium, parks it in that account, and then pays those bills for you when they come due.

Why lenders do it: the property is their collateral. Unpaid property taxes in Texas create a lien that outranks the mortgage, and an uninsured house that burns down is a total loss for them. They are not going to leave either bill to chance.

Almost every buyer with less than 20 percent down will have an escrow account, and it is generally required outright on Federal Housing Administration loans. You can sometimes waive escrow with a large down payment, and I usually tell people not to. Texas property taxes arrive as one enormous bill each fall. Very few households save for that reliably.

Why El Paso Escrow Accounts Are So Large

Here is the part that catches every buyer moving here from out of state.

Texas has no state income tax. It funds schools, hospital districts, the county and the city through property taxes instead, and our combined rates run roughly 2.5 to 3 percent of assessed value per year depending on which taxing entities cover your address.

On a $250,000 home, that is about $6,250 to $7,500 a year. Divided by twelve, that is roughly $520 to $625 a month, going into escrow, every month, forever. Add homeowners insurance at $100 to $150 a month in El Paso, and the escrow portion of your payment is somewhere around $620 to $775.

Compare that to a state with a 1 percent effective tax rate, where the same house would escrow closer to $210 a month for taxes. That gap is not a rounding error. It is a car payment. It is also why the mortgage calculator you used before you got here lied to you: those calculators default to national average tax rates, and ours are not average.

The full picture on how our rates get set, and why they are what they are, is in the El Paso property tax guide.

Two things reduce the number. The homestead exemption lowers your taxable value on your primary residence, and it also caps how much your appraised value can rise each year at 10 percent once it is in place. Protesting your appraisal is normal here, and it works often enough to be worth doing every year. Both are covered in the homestead exemption and property tax protest guide.

What You Prepay at Closing to Set the Account Up

This is the second surprise. Your escrow account has to start with money in it, which means at closing you are funding it in advance.

Expect to pay, on top of your down payment and closing costs:

• A full year of homeowners insurance premium, paid up front
• Several months of property taxes to seed the account
• A cushion, which federal rules allow to be up to two months of escrow payments

Depending on where you land in the tax calendar, that prepaid piece can run a few thousand dollars. It is not a fee anyone is charging you, it is your own money going into your own account, but it is real cash you need on closing day. This is the most common reason a buyer's cash to close comes back higher than they expected.

The Annual Escrow Analysis, and Why Your Payment Changed

Once a year your servicer reruns the math. They look at what actually got paid out of the account against what you paid in, and they set your new monthly amount.

If your appraised value went up, or a taxing entity raised its rate, or your insurance renewed higher, the account comes up short. Two things then happen at once, and this is what makes the letter feel so brutal:

1. Your monthly escrow payment rises to cover the new, higher annual bill.
2. The shortage from the past year gets spread across the next twelve months on top of that.

So a tax increase of $60 a month can show up in your mailbox as a payment that jumped by $120. The second piece falls off after a year. The first does not. If that letter has already arrived, I walk through your options in the escrow shortage and Texas property tax guide.

There is one specific version of this that hits El Paso hard: new construction. When a builder's lot is first assessed, the county may still be valuing it as vacant land. Your first year escrow gets set on a tax bill for dirt. Then the house gets on the tax roll at full value, the bill triples, and your payment jumps several hundred dollars in year two. If you are buying new in Eastlake, Horizon City or the far east side, ask the lender to escrow based on the fully improved value, and ask whether the neighborhood sits in a public improvement district or municipal utility district, because those assessments push the rate higher still.

Insurance is the other lever you actually control. Shop it annually, and understand what your policy does and does not cover before you renew out of habit. The El Paso homeowners insurance guide covers what matters in our climate.

Frequently Asked Questions

What is escrow in Texas?

It refers to two things. During a purchase, escrow is the title company holding your option fee and earnest money as a neutral third party. After closing, escrow is the account attached to your mortgage that collects property taxes and homeowners insurance monthly and pays those bills when they come due.

Who holds escrow money in a Texas real estate transaction?

The title company, acting as the escrow agent. Texas closings are handled by title companies rather than attorneys, and the title company also runs the title search and issues the title policy.

Is earnest money the same as the option fee?

No. The option fee is a small nonrefundable payment, typically $200 to $500 in El Paso, that buys your right to terminate during the option period. Earnest money is a larger deposit, typically $1,000 to $3,000, that is credited to you at closing and is refundable in the circumstances the contract allows.

Why is my escrow payment so high in El Paso?

Because Texas property taxes are high and Texas has no state income tax. Combined rates around here run roughly 2.5 to 3 percent of assessed value, which on a $250,000 home is about $520 to $625 a month in taxes alone before insurance.

Why did my mortgage payment go up when I have a fixed rate?

Your rate is fixed, but taxes and insurance are not. The annual escrow analysis raises your monthly amount when the underlying bills rise, and it also spreads last year's shortage over the next twelve months, which is why the increase often looks larger than the tax increase itself.

Can I skip having an escrow account?

Sometimes, with a large down payment and lender approval, and often for a fee. Federal Housing Administration loans generally require escrow. I usually recommend keeping it, because Texas property taxes arrive as one large bill and most households do not save for it well.

The Bottom Line

Escrow during the transaction is short, and its job is to keep your money out of the seller's hands until everyone has done what they promised. Escrow on your mortgage is permanent, and its job is to make sure the tax bill gets paid. The first one protects you. The second one is where El Paso buyers get surprised, because our tax rates are high enough to add hundreds of dollars a month to a payment that looked fine on a calculator.

Before you make an offer, know the actual escrow number for the actual address, not a national estimate. If you want that number run, tell me the price range you are looking in and I will show you the full payment with current El Paso rates, including what the new construction version looks like in year two.