What Is Escrow?
What Is Escrow and How Does It Work?
Escrow is like a middleman in real estate transactions. It’s a legal setup where a third party temporarily holds money or property until a specific condition is met. Think of it as a safety net for both the buyer and the seller during the home buying process.
Why Do We Use Escrow?
- Reason 1: To protect the buyer’s good faith deposit (also known as earnest money). This deposit shows the seller that the buyer is serious about purchasing the home.
- Reason 2: To hold funds for property taxes and homeowners insurance throughout the mortgage term.
Types of Escrow Accounts:
- Home Buying Escrow: Used when buying a home. The good faith deposit sits in this account until the deal closes.
- Loan Escrow: Used throughout the life of your loan. It handles ongoing payments for taxes and insurance.
Extra Tidbit:
- Sometimes, there’s an escrow holdback. This happens when funds are held beyond the home sale completion. Maybe the seller stays an extra month, or there are outstanding bills (like a water bill) to settle.
In a nutshell, escrow keeps things fair and ensures everyone plays by the rules!
How Escrow Works for Taxes and Insurance
Setting Up Escrow:
- When you buy a home, your mortgage lender creates an escrow account.
- This account holds money for your property taxes and homeowners insurance.
- Each month, a portion of your mortgage payment goes into this account.
Why Escrow Amounts Change:
- Taxes and insurance costs can vary from year to year.
- To keep things covered, lenders require extra payments in the escrow account (usually 2 months’ worth).
Annual Checkup:
- Your lender reviews the escrow account yearly.
- If they’ve collected too much, you get an escrow refund.
- If they’ve collected too little, you’ll need to make up the difference.
- Who Handles Escrow?:
- Escrow companies, agents, or mortgage servicers manage these accounts.
- It depends on where you are in the home-buying process.
Escrow Companies and Mortgage Servicers
Escrow Companies and Agents:
- When you buy a home, escrow is managed by either a mortgage servicing company or an agent.
- Sometimes, the escrow agent is the same as the title company.
What Escrow Companies Do:
- They handle the buyer’s deposit and also keep important documents like the deed.
- Since they work for both the buyer and seller, their fee is usually split evenly.
Mortgage Servicers:
- These folks manage your mortgage from closing until you pay it off.
- They collect your payments, maintain records, and handle your escrow account.
Who’s Your Servicer?:
- Your servicer might be your original lender or someone else.
- Make sure you know who typically services your loans.
No Worries About Bills:
Your servicer ensures your taxes and insurance get paid on time.
Unless you change insurance providers, they’ve got it covered!
The Benefits Of An Escrow Account
The biggest benefit of having an escrow account is that you’ll have peace of mind knowing you’re being taken care of by the most awarded mortgage company ever, based on J.D. Power’s consumer surveys.*
Benefits of an Escrow Account For Home Buyers:
Protection:
An escrow account shields your deposit during a home sale.
Example: Imagine you have a purchase agreement, but the sale falls through due to a home inspection issue.
If you’d given your deposit directly to the seller, they might not return it. But with a third party holding it, you’re assured it’ll be returned as agreed.
For Homeowners:
Financial Relief:
Escrow eases the burden of paying a lump sum for taxes and insurance.
Throughout the year, you pay smaller amounts, making it more manageable.
Plus, no need to juggle different due dates! Your mortgage servicer ensures timely payments.
If your escrow account lacks funds, they cover bills temporarily (but you’ll need to make up the shortage later).
For Lenders:
Protecting Their Investment:
Unpaid taxes could lead to a lien on your home, costing lenders if the tax authority forecloses.
Lapsed homeowners insurance risks significant damage or loss, affecting the home’s value.
An escrow account ensures bills are paid, safeguarding everyone’s interests.
Disadvantages of an Escrow Account
- Higher Monthly Payments:
- Why?: An escrow account is funded through your monthly mortgage payment.
- Result: Your monthly bill is higher, but here’s the silver lining: You avoid paying taxes and insurance in one big lump sum.
- Lower Escrow Estimates:
- Why?: Escrow depends on property taxes and insurance costs, which change yearly.
- Catch: When you move into your home, it’s reassessed for taxes. If the value rose, taxes may spike.
- Outcome: Sometimes, your escrow falls short. You’ll need to pay the difference later.
- Bonus: If there’s leftover money, your servicer refunds you.
- Changing Monthly Payments:
- Annual Checkup: Escrow gets reviewed each year.
- Scenario 1: If you were short, your mortgage payment goes up (to prevent shortages).
- Scenario 2: Too much money? Your payment drops, and you get a refund.
What Escrow Accounts Don’t Cover
Not Everything Covered:
- Fact: Escrow accounts don’t handle all homeownership expenses.
- Examples: They won’t pay your utility bills or HOA fees.
Supplemental Tax Bills:
- What Are They?: One-time tax bills due to ownership changes or new construction.
Important: Escrow doesn’t cover these.
Choosing Escrow or Not:
Option 1: You can pay taxes and insurance directly (lowers monthly mortgage).
Catch: You’ll need to save for those payments.
Fee Alert: Managing your own taxes and insurance may cost you.
Hint: Escrow service is free, so it’s usually better to stick with it.
No Escape for Everyone:
Reality Check: Some loans require an escrow account.
Examples:
VA loans: Need 10% down and strong credit to opt out.
Conventional loans: 20% down or more.
FHA loans: Everyone needs an escrow account.
Mix and Match:
Variety: You can use your escrow for some expenses but not others.
-
- Example: Lenders may require it for taxes but not homeowners insurance.
Escrow Process FAQs
- What’s an Escrow Balance?:
- Your monthly payment has three parts: principal, interest, and escrow.
- The escrow balance covers taxes and insurance payments.
- It lets the loan servicer pay these bills from your account.
- Escrow Agreement:
- It’s the contract terms between parties.
- Usually involves an independent third party (the escrow agent).
- Being “In Escrow”:
- It’s like a legal holding account.
- Money or property can’t be released until all conditions are met.
- Why Escrow Matters:
- Buyers and sellers benefit during home sales.
- Convenient way to handle taxes and insurance.
- To Escrow or Not?:
- Depends on loan type and your finances.
- Skipping escrow may lower your payment, but it’s usually better to stick with it.
- Peace of mind: Bills get paid without stress.
GET IN TOUCH
4445 US Hwy 17 W
Haines City, FL 33844
Office (863)421-2105
Shane (863) 589-8725
Cheryl (863) 206-8540
Shane@AmericanDreamRealty.info