A quick briefing on the basics of escrow.
When you’re in the process of buying a new home, you hear a lot of real estate and title jargon thrown around often that you might not be so familiar with. Does escrow ring any bells? If you’re in the process of closing and you hear this term, don’t worry. We’ll help break it down for you.
What is Escrow?
If you’re using a mortgage to buy your home, then it’s likely your lender will have you put money into an escrow account. It might sound a little intimidating, but it’s really just another financial account that is managed by a neutral third party. The funds in this account are managed by this neutral party until the transaction or contract is complete.
How Does it Work?
Escrow accounts are special accounts for your property tax payments and homeowners insurance premiums. You don’t pay monthly payments from these accounts each month, instead, your lender will collect money from your monthly mortgage payments to put towards this account and pay the bills on your behalf.
When Will You Need an Escrow?
Typically, your lender will require you to have an escrow account if your down payment on your home was less than 20%. But there are certain home buying loans that require you to use an escrow account regardless of your down payment. If you purchased your home with a USDA or FHA loan, then you will need an escrow account.
Your First Escrow Experience
One of the first things you’ll use an escrow account for is to deposit your earnest money. Your earnest money payment shows the seller that you’re serious about buying the property and that you won’t back out (and if you do, the seller will be protected through your earnest money payment).