When it comes to buying a home chances are you will run into an escrow account. It is something you will most likely only encounter when you do buy a home. What exactly is an escrow account and what should you know about them?
What is an escrow account?
When it comes to buying a home you are required to pay a significant amount of money, not just with the home itself but in property taxes and insurance. There is also important paperwork that needs to be held to ensure that everyone involved in the real estate transaction gets paid what is agreed upon. A third party, which can be an attorney’s office, escrow agent or a real estate title company will hold the necessary paperwork while negotiations for the property are taking place. An escrow account that is set up between you and your mortgage lender will allow you to have an account in place that you can pay part of the estimated annual costs to cover the costs of the taxes and insurance. In simple terms it is a holding account that you add to every month so when it comes time to pay the taxes and insurance you have the money available instead of having to come up with it all at once.
Types of escrow accounts:
There are typically four different types of escrow accounts that can be utilized when buying a home.
1. When you sign the purchasing agreement, the earnest money escrow, is the deposit you initially pay to the seller.
2. The deed to the property can also help in an escrow account until the sale is finalized. Once the sale is completed the deed will be transferred over to the new owners and recorded at the county courthouse.
3. The loan proceedings from your lender will also be held in an escrow account until the closing is finalized. The money will be distributed to the seller or to pay off the loan to the seller’s mortgage lender.
4. At the closing, the monthly payment escrow will be determined.
Escrow services have no fixed rate and are unregulated, but most often are determined based on the value of the home you are planning on buying. Most escrow agents will charge a flat fee but will also add on additional charges for wire transfers and office expenses. The fees of the escrow account in many states are divided up between the buyer and seller, but in other locations, it may be up to the seller to cover all the escrow account fees.
Setting up an escrow account with your mortgage lender is highly recommended. Payments are based on estimated costs that can cover your insurance and property taxes. Sometimes these estimations are less than what you owe and sometimes they are more. When the estimation is too little to cover the insurance and property taxes the remaining balance can be spread out overpayments in the following year, if you ended up paying extra the money is refunded back to you.