Home Buying: The Basics of Escrow
The multitude of steps and terminology involved in buying a house can be overwhelming. While a good realtor will walk you through everything you need to know, it helps to have a firm understanding of some things before you get pre-approved and start making offers. Learn more about escrow below.
You may want to investigate more Buyer articles meant to save you time and money.
One key component involved in nearly every sale is the escrow, or impound account. This is an account set up by your mortgage lender to pay certain property-related expenses on your behalf (property taxes and homeowner’s insurance).
Many (mortgage) lenders require an escrow account, to insure that the property is not at risk. The fees can vary from year to year, and are generally rolled into monthly mortgage payments.
Escrow Accounts come into play with several home buying expenses like a home buyers' earnest money. If an offer is accepted, then and only then is your earnest money check deposited into the real estate brokers's escrow account. This account is for earnest monies only, and other funds may not be commingled with earnest money deposits. Earnest money is received back at closing.
Understanding Earnest Money - What is it and how much?
Many states require an escrow account, but even if yours doesn’t, it’s prudent to have. Without an escrow account, homeowners will be responsible for large property-related bills in lump sums, and not always at convenient times. Failure to pay property taxes in a timely manner will also result in fines and fees.
The portion of your payment that is property tax and home insurance are taken out of each payment and placed in the escrow until it's time to make remittance (payment) on these items, ensuring that the property is not at risk. This practice helps protect both the home owner and the lender of record.