Escrow

Explaining Escrow

If you are at all familiar with the homebuying process, it is likely you have heard the term ‘escrow’ being used often. But it can be difficult to grasp this term until you go through it yourself, and even then it may be quite confusing!

Well, this article will give you an explanation of what escrow means in simple terms anyone can understand.

Escrow is the neutral third party assigned with the role of holding funds and distributing them in accordance with the contract. If there is a breach in contract, funds can be frozen in escrow until the dispute is resolved.  

Escrow Before You Buy Your Home

Once your offer is accepted, you are required to come up with earnest money. This is money that is deposited into the escrow account to show you are serious about buying. It is usually 1-5% of the home’s purchase price.

Once the deal closes, the earnest money is returned to the buyer. It is then typically applied toward the down payment.

If the deal falls through because the buyer changes their mind, the seller gets to keep the earnest money. If the deal falls through due to a seller not coming through on repairs or damage that is found during inspection, the buyer will get their money back.

Escrow After You Buy Your Home

After you buy your home and get your earnest money back, a second escrow account is opened. This will be used through the life of your loan.

The amount of money put into this account will be calculated by the lender based on the money required to maintain your mortgage. The lender will dip into this fund to pay property taxes and home insurance premiums to ensure you don’t get a lien on your home.

Despite the loan, you will still have to make some upfront payments. For instance, you may have to pay for your first year of insurance. Then your lender will take all subsequent payments from the account.

You also may have to make a few property tax payments up front. After that the escrow account will take over.

The amount you pay into your escrow account will depend on your insurance and property tax rates. For instance, if you are paying a total of $7200 a year on property tax and insurance, you will have to pay $600 a month into your account to cover these payments.

Because rates can fluctuate, your lender will do an annual escrow analysis to make sure you’re paying the right amount. In some cases, your payments may increase. In other cases, they may decrease.

If your payment amount decreases, the lender may keep an amount equal to two extra payments plus $50 in your account. The rest will be refunded to you.

This sums up escrow and will hopefully make your home buying experience go as smoothly as possible.