What Is Escrow And How Does It Work?
So what exactly is escrow. If you have recently bought a house or are thinking about buying a house, you will need to know what escrow is. Here is a quick overview of what escrow is and how it works.
Escrow is a deposit that is held by a third party or escrow agent. So in other words, an escrow deposit, is the money you put down on your new home. Your escrow deposit is held in a secure location by a neutral third party.
The escrow agent works for both the lender and the buyer and their purpose is to carry out the instructions that both parties have agreed on. The escrow agent will release your money once all of the terms of your agreement have been upheld.
Your mortgage lender will more than likely require you to open an escrow account to make sure there is enough money to cover your insurance and taxes. The way this works is you will make an initial deposit to your escrow account followed my monthly installments. Most lenders will arrange to have this included in your monthly mortgage payments. When your taxes and insurance premiums come due the escrow agent will release the funds to the appropriate party.
The reasoning behind having an escrow account is to protect the lender in the event you default on your payments. The lender is then protected from external perils that could arise as a result of you not paying your taxes or your insurance causing the lender to be left with no collateral.
An escrow account also helps the buyer because it allows you to spread your payments evenly over a 12 month period. Just imagine if your yearly taxes were $3000 and your yearly insurance was $1400, that would leave you owing $4400 in one lump sum.
Your escrow amounts could change from year to year due to the possible increase in your taxes and insurance. Therefore, your lender will review and adjust your escrow amounts annually and you will be given a revised mortgage payment if your taxes or insurance go up. On the same token; however, if your taxes or insurance rates go down, you will be given a refund.
Sometimes an escrow requirement can be waived. Some buyers prefer to pay all of their taxes and insurance directly. Your lender may allow you to do this if your down payment is more than 20% but they will more than likely raise your interest rate slightly to compensate. One thing to remember is that once you begin putting your funds into an escrow account, it can be difficult to cancel this process so make sure that you fully understand what your options are before doing anything.
Well, I hope that I have fully explained what escrow means and how it works. However, if there is anything you don’t understand or anything you have questions about, please call your realtor. Your realtor has many years of experience with these kinds of things and will be more than happy to assist you.
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About the Author: Millie Gil has been a successful Licensed Real Estate agent for over 25 years in Florida. Millie is Vice President of Bold Real Estate Group, a boutique agency committed to concierge personalized service for discerning buyers, sellers and renters of residential and commercial properties. For more information please forward your request to communityinfo@comcast.net
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