Escrow is a term that you have certainly heard used before, most likely by someone purchasing or selling a home. However, if you have never bought a property for yourself, you might not know what this word refers to.
Escrow is a crucial (and required) component of many large purchases, but it frequently surprises first-time purchasers. So let's look at what an escrow account may offer you and how it will affect your house purchase.
Describe Escrow.
Escrow, to put it briefly, is a third-party financial arrangement designed to safeguard both parties to a significant sale. It is most frequently used in real estate transactions, but you will undoubtedly encounter it when you repay your mortgage debt.
Escrow's Workings
Escrow gives the buyer and the seller a secure mechanism to transfer money while preventing price competition between them. The funds associated with the sale will be accepted and held by an independent and impartial service until all conditions are satisfied. The monies will only be released after that.
When two parties decide to move forward with a deal, escrow opens. When a seller accepts your purchase offer for a house, that is.
When moving forward with an accepted offer on a house, you as the buyer will be required to deposit earnest money. These funds are your method of committing to the purchase, and they can be anywhere from a few hundred dollars to 2-3 percent of the home's worth, depending on the market at the time.
Your earnest money is not given to the seller immediately; instead, it is placed in an escrow account. When all parties have fulfilled their obligations under the purchase agreement, it will be kept there until closing.
These monies are reimbursed to you if the seller cancels or is unable to finish the transaction. In recompense for the time they lost while their home was off the market, the seller frequently keeps this money if you decide to back out. This money is often used to cover your closing fees and/or purchase price, though, if everything goes according to plan, the sale will go through.
Mortgage Escrow
Escrow could also come up again, years after you bought your house, in the form of mortgage escrow.
For items like real estate taxes, homeowner's insurance, and other things, your lender might decide to use an escrow account. The lender will hold these monies in an account and withdraw them each month along with your principal mortgage payment. They will be deducted from this sum when it comes time to pay property taxes or insurance payments.
Things to Keep in Mind
When purchasing a home, there are a few things to keep in mind about escrow accounts.
First off, escrow services for real estate are not gratis. This third-party service will incur an additional fee at closing, which is often shared by the buyer and seller. Escrow costs are rarely more than a few hundred dollars, but it is still important to be aware of them.
Second, even though the money is being held at a bank, the consumer won't normally receive interest on the money in escrow.
Therefore, you will understand exactly what it means the next time someone mentions being "in escrow" or when you begin the process of purchasing your own house. Escrow is a crucial step in any home acquisition since it safeguards money for all parties.
This article was contributed on Jul 31, 2022
