So you’ve come across the term “Escrow” by now. It sounds slightly out of place in the land of Real Estate and Mortgage Loans, but it’s important. This critical financial arrangement makes homebuying much easier. Let’s look at why that is.

Defining Escrow:

Escrow is a legal, financial arrangement between three parties: the buyer, the seller, and a third party, typically arranged by the title company. The third party will hold either large quantities of money or the title to the property until certain conditions of the contract are met. This is to protect the buyer and seller during the homebuying process. 

Different Types Of Escrow:

There are two types of Escrow in the Real Estate world.

  • The Good Faith Deposit Made When Buying A Home
  • The Savings Account Connected With A Mortgage For Taxes & Insurance.

The first type is only used once, during the purchasing process. A buyer deposits their “Good Faith” money into the escrow account as the title and inspections are being processed. The second type is a savings account used throughout the entire life of the loan, used to accrue extra money to pay yearly taxes and insurance fees.

Good Faith Deposit Escrow Accounts:

These accounts are used during the homebuying process. When a purchaser is ready to buy a home, they will deposit their “Good Faith” money into this escrow account. This money tells the seller you’re serious about buying the house. It is held there until the close of the transaction. This is when the escrow account is closed and the money put towards the down payment on the home. If the purchase does not go through, the seller typically keeps the money. 

Mortgage Escrow Accounts:

These accounts are used throughout the life of a mortgage loan. Each payment homeowners make on their mortgage includes a deposit into this escrow account. At the end of the year this money is used to pay taxes and insurance. After the last payment on the loan the remaining funds in the account are returned to the homeowner.

Due to fluctuating tax rates, the amount deposited into the escrow account may vary. This also changes the mortgage payments, slightly. To ensure the account never runs out of money some lenders require at least 2 extra months worth of deposits. If, when taxes and insurance come due, the escrow account does not have enough funds, the homeowner must make up the difference.

What They Don’t Cover:

Escrow accounts do not cover HOA fees, utility bills or supplemental tax bills. 

Are Escrow Accounts Necessary?

Most mortgage loans include an escrow account. It isn’t typical for homeowners to opt out of these payments, but it has been known to happen. Opting out of these payments would decrease mortgage payments overall, but the homeowner would need to save for taxes and insurance on their own. 

What Else:

Escrow accounts are essentially used to protect Sellers and Buyers throughout the purchasing process and the life of a mortgage. It’s a tool to make life easier and protect both parties. It is meant to provide peace of mind, not create financial burden. If you have more questions about an escrow account, contact your mortgage provider, a title company, or The Wise Team! We’re here to help you through the Real Estate Market, whether that be your first time home buying experience or your third.