Escrow

The term escrow can refer to two completely different things when you are buying a house. As if the process isn’t complicated enough! The first relates to your earnest money and the second relates to hazard insurance and property taxes.

The basic Definition

Escrow is a process used to regulate payments between two parties. A trusted third party holds the transaction amount until all terms of the agreement are met by both parties, then releases the payment amount to the seller.

Earnest Money

When you make an offer on a house, you’ll have to make a small deposit. If you are buying a $200,000 house, you might be required to write a check for $2,000 or 1% of the purchase price. This helps the seller feel comfortable that they can take the house off the market.

An escrow agent, usually an attorney, will hang onto the your money and make sure all the conditions of the purchase agreement are met. Your escrow payment can be applied to your closing costs when you and seller close on the home.

Mortgage Escrow Account

The other use of the term escrow relates to your mortgage payment. Most home owners have an escrow account with their mortgage company. This allows them to pay for annual expenses little by little every month. Let’s say your hazard insurance is $1,200 a year and is due in November. Your mortgage company will collect $100 from you every month and put that into an escrow account until the insurance company needs to be paid. Then the mortgage company will pay the mortgage company on your behalf.

You’ll be required to fund your escrow account upfront when you buy your home. This gives the bank a little cushion in case the bill is a little different than expected and to account for timing.

Read more on monthly mortgage mortgage payments here.

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Read more Key Mortgage Terms.

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