If you are buying or selling a home, you will encounter the term escrow multiple times. It sounds complicated, but the concept is actually straightforward.
Escrow During the Transaction
When you make an offer on a home and it is accepted, your earnest money deposit goes into an escrow account. This is a neutral, third-party account that holds the funds until the transaction is complete. Neither the buyer nor the seller can access the money until all conditions of the sale are met.
Who Manages Escrow?
An escrow agent, title company, or attorney typically manages the escrow process. They act as a neutral party to ensure that all terms of the contract are fulfilled before funds and property change hands.
Escrow After Closing
Many lenders set up an ongoing escrow account to handle your property taxes and homeowners insurance. Instead of paying these large bills once or twice a year, the amounts are divided into monthly installments and added to your mortgage payment. Your lender then pays these bills on your behalf.
What Gets Paid From Escrow?
Common items paid through your escrow account include:
- Property taxes: Collected monthly and paid to your local tax authority when due.
- Homeowners insurance: Your annual premium divided into monthly payments.
- Mortgage insurance: If you have private mortgage insurance (PMI), it may be collected through escrow as well.
Escrow Shortages and Surpluses
Each year, your lender reviews your escrow account to make sure the right amount is being collected. If property taxes or insurance rates change, your escrow payment may go up or down. If there is a shortage, you may need to make up the difference. If there is a surplus, you will receive a refund.
Why Escrow Protects You
Escrow protects both parties in a transaction. Buyers know their deposit is safe until the deal closes. Sellers know the buyer is committed. After closing, escrow ensures important bills like taxes and insurance are always paid on time.
Bottom Line
Escrow is a simple but important part of the homebuying process. If you have questions about how escrow works in your transaction, your Homexa® agent and lender will walk you through every detail.