Escrow: What is it?
Escrow is one of those terms that people are intimidated by, but they aren’t sure why. We’ve all heard of the mysterious escrow, but do we really know what it is, or what an escrow account is for? Well, let’s take a deep dive into the world of escrow and figure out exactly what this mortgage term means.
What is Escrow?
Escrow is a deposit of funds, a deed, or other instrument from one party to another party upon completion of a particular condition or event. During a major financial transaction between two parties, escrow is an arrangement where you use a neutral third party to hold something of value (usually money). Ideally, the escrow provider is impartial as to whether the buyer or seller comes out ahead. The provider could be an attorney or a title company representative. The funds are only released by the escrow company when all of the terms are met during closing.
Escrow Before Closing:
Typically, escrow pops up once you’ve found a house that you’re invested in buying. You’ve done the walk through and made an offer. At that point, your loan officer or Realtor will direct you to put an earnest money deposit into escrow. (Earnest money shows that you are serious about purchasing the property and have the financial means to do so. This amount depends on the situation, cost of the home, and the seller.) This deposit will be held in escrow until closing where the money is either returned to you or applied to the down payment.
The Escrow Account After Closing:
You’ve closed on your home and escrow has also been closed. However, you hear talk of a mysterious escrow account. Well, an escrow account is a separate bank account used by your lender to pay your property taxes and home insurance. When you get a mortgage, the lender usually adds the property taxes and insurance premiums to your monthly mortgage payment. They set this money aside by using an escrow account to make sure the property tax and insurance gets paid on time.
Whether you are the buyer, seller, lender, or borrower, you want the guarantee that the funds of your transaction are safe and will not change hands until every single one of the transaction requirements have been met. Escrow continues to be a neutral (albeit mysterious) resource that has proven to be invaluable to many people during and after the mortgage process. If you’re ready to consider buying a home, contact one of our loan officers to get started. You can give us a call at 800-759-7224 or find a loan officer in your area.