Understanding Escrow
Understanding escrow and escrow companies is a vital part of the home selling or buying process. It is important to understand their role in the grand scheme of real estate transactions so you are informed and armed with all the right information. Let’s take a closer look at what escrow is exactly.
Definition and Purpose of Escrow
Let’s first get into what escrow is exactly. Escrow is a legal concept describing a financial agreement where an asset or money is held by a third party on behalf of two other parties completing a transaction. Moreover, escrow accounts are managed by the escrow agent, releasing assets or funds only upon fulfillment of predetermined contractual obligations. In addition, money, securities, funds, and other assets can be held in escrow.
Escrow Accounts
Types of Escrow Accounts
Let’s get into the types of escrow accounts that exist. There are homebuyer escrow accounts and homeowners escrow accounts.
- Homebuyers escrow account: this type of account is used to hold earnest money deposits, typically 1-2% of the purchase price.
- Homeowners escrow account: this type of account is used to hold funds for insurance premiums, mortgage insurance payments, and property tax payments. Monthly payments are used to cover property taxes and homeowners insurance, with the lender keeping the amounts in the escrow account and making the payments when they are due. The estimated costs of property taxes and homeowners insurance are included in the monthly mortgage payment. The convenience of monthly escrow payments helps spread out these expenses, but potential adjustments may be required for these estimated monthly amounts. Mortgage payments can be adjusted based on the annual analysis of the escrow account. The escrow account is also used to pay property taxes and insurance premiums to ensure timely payments.
How Escrow Works
Calculating Escrow Payments
There are many fees when you are dealing with a real estate transaction and escrow payments are one of them. Lenders estimate your taxes and insurance costs over the next 12 months based on your loan closing documents. They then divide this estimate by 12 and add it to your monthly mortgage payment, which includes amounts for property taxes, homeowners insurance, mortgage insurance, and flood insurance. This ensures you’re making the right amount of payment each month.
Escrow in Real Estate
Role of Escrow in Home Buying
Now the role of escrow in home buying is vast. Escrow accounts can apply to real estate transactions, allowing the buyer to make a good faith deposit or perform due diligence on a potential property acquisition. Escrow accounts assure the seller that the buyer is serious about the purchase. This can help bring peace of mind when you “open escrow” to both the buyer and the agent, acknowledging that the real estate transaction is moving forward and all parties are on board.
Managing Your Mortgage Escrow Account
Who Controls the Mortgage Escrow Account?
During the home-buying process, buyers and sellers typically use a title company or bank to serve as the escrow agent. Once you become a homeowner, your mortgage lender is typically responsible for managing the escrow account.
Escrow Fees and Analysis
What are Escrow Fees?
Now it’s important to understand escrow fees. They are are typically 1% of the purchase price, but can vary widely depending on location. Some mortgage lenders may allow you to waive the escrow requirement and pay bills directly for a fee. Again, each situation is unique.
Escrow Analysis: A Regular Review
An escrow analysis is a yearly review conducted by the mortgage lender to ensure that there are enough funds in the escrow account. An escrow account is used to make regular payments for property taxes and insurance, ensuring that these obligations are met on time. The analysis projects whether the account will have a shortage or overage, and informs the homeowner of any changes to their account. This is important information to know!
The Pros and Cons of Using an Escrow Account
Advantages of Escrow Accounts
There are many advantages when using an escrow agent. For starters, escrow accounts provide parties to transactions an assurance of security for a fee. Escrow accounts for mortgages can help protect the borrower and lender from potentially late payments for property taxes and homeowners insurance.
Disadvantages of Escrow Accounts
The biggest disadvantage is the loss of control over the funds.
Protecting Yourself from Escrow Fraud
Common Scams and Fraud Schemes
It is important to note that escrow accounts have become targets for scammers, who may try to get your login credentials or have you wire funds to a fraudster. Always carefully review any communications relating to your escrow account and alert your lender or servicer if you suspect fraudulent activity.
Trusted House Buyers
If you are someone you know is looking to sell their home quickly, Trusted House Buyers is simply a phone call away at 619-786-0973. We can guide you through the process every step of the way, including escrow. We can usually close within 10 days, making the escrow process much simpler and faster. We are extremely flexible and can work within your timeline and unique circumstances. We know now all house selling situations are created equal and working with Trusted House Buyers allows for a very customized and streamlined approach to the selling process. Give us a call!
