What is Escrow?

As if finding the perfect home and the financing to buy it aren’t complicated enough, it can also seem like you have to learn a whole new vocabulary to get through it, especially if you’re a first-time buyer.

Well, you can rest easy. Terms like underwriting, debt-to-income ratio, and points weren’t created to confuse you. They’re there to protect you as well as your lender, the seller, and both of your real estate agents.

Take escrow, for example.

Escrow is the use of a third party, which holds an asset or funds, until they are transferred from one party to another. The third-party holds the funds until both parties have fulfilled their contractual requirements.

When buying a home, you may use two escrow accounts—one during the purchase, and one to simplify paying off your mortgage. Say you’ve found a home you love and want to make an offer. With your written offer, you include earnest money, typically 1–3% of the home’s purchase price, to demonstrate your intent to buy the house. This money is placed in an escrow account until the purchase is finalized, at which point the earnest money will be applied to your down payment.

When you close on the property (i.e. finalize the sale), your lender may set up an escrow account for you. From this account, monthly mortgage payments will be made on the loan’s principal and interest, as well as annual costs for homeowner’s insurance and property taxes. Although escrow accounts are optional, many lenders require you to use one. And many borrowers prefer it, as it streamlines monthly bill paying, ensures that you have money set aside for taxes and insurance, and that your payments are made on time.

Have more questions about escrow, or anything else mortgage-related? A Mortgage Loan Originator can help you make sense of it all. Contact us anytime.

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