The community runs along both sides of the Rio Grande on New Mexico State Road 68, beginning at Embudo Station located 2.9 miles (4.7 km) south of the intersection of New Mexico State Road 75, near where the Embudo Creek (Rio Embudo) flows into the Rio Grande, encompassing the communities of La Bolsa and Rinconada and ending at the Taos County Line.

The name "Embudo", meaning "funnel" in Spanish, was given to the area by early Spanish settlers because the spot where the Rio Embudo flowed between two distinctive cone shaped hills reminded them of a funnel.

Embudo was founded in 1881 when the Denver and Rio Grande Western Railroad opened a station (depot) there on its Chili Line.

The United States Geological Survey (USGS) gauging station at Embudo, to measure the flow of the Rio Grande, was the first (USGS) stream gauging station and was established by John Wesley Powell in 1888.

In 1974 US 64 was realigned to end at Tonopah, Arizona rather than Santa Fe bypassing Embudo.