HomebuyingFinancial IQFeatured May 31 2019

What is Escrow?

When you’re buying a home, you’ll hear the word escrow multiple times throughout the process! The meaning varies slightly, but all of the variations have to do with funds being set aside for your home.

The Offer

The first time is typically when you make an offer on a home. When you write a check for earnest money, showing the seller you are serious about buying, your earnest money is held in escrow by a third party. This protects both you and the seller should you not reach an agreement on the contract.

As the buyer, you’re protected as soon as the offer is accepted. The seller must remove the home’s active listing and cannot accept any other offers. Your contract will typically have several contingencies that allow you to back out of the contract without consequence, for example, if the home doesn’t pass inspection. However, if you walk away for an uncovered reason, the seller is protected and keeps your earnest money.

Closing of Escrow

When your home purchase is complete, you may hear the term closing of escrow. This means that all funds associated with your home purchase are properly disbursed, the documents are signed & recorded, and all other conditions have been met to finalize the purchase of your home.

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Mortgage Escrow Account

As a homeowner, you’ll be responsible for additional payments like property taxes and homeowner’s insurance. An escrow account allows you to set funds aside each month for these bills, so you don’t have to worry about coming up with a lump-sum when they are due.

How does it work?

Your lender will estimate the amount you will owe over a 12-month period and divide the cost over your monthly mortgage payments. For example, if your annual property taxes are estimated at $2,000 and your yearly homeowners insurance premium is $1,000 you will set aside $3,000 in your escrow account for the year, or $250 monthly.

Your monthly escrow payment is then added on to the Principal & Interest portion of your mortgage payment. The money is set aside monthly, so when your property taxes and homeowners insurance premium bills are due – your mortgage servicer takes care of the payments for you by withdrawing the funds from your escrow account.

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Yearly Re-evaluations

Property taxes and homeowners insurance premiums might change year to year as the value of your home fluctuates. As a result, the amount needed in your escrow account could change and must be reevaluated each year to account for any anticipated surplus or deficit.

What this means is that even though you may have a fixed-rate mortgage your monthly mortgage payment could change each year due to the escrow account portion. Don’t worry, your mortgage servicer will keep you updated with any changes!

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