You’ve probably heard of escrow, but might not fully understand what escrow is or how it works. If you’re thinking about buying a home, you’ll want to read below.
What is Escrow?
Escrow is when money is held by a third party while a transaction is in progress. There are two types of escrow to know about in regard to home buying; escrow before closing, and after.
Once you’ve found a home and made an offer, you’ll put an earnest money deposit into escrow. Earnest money shows the seller you are serious and financially able to make the purchase. The amount of earnest money will vary depending on the situation and seller’s requirements.
Instead of giving this earnest money to the seller, the money will be held in escrow, along with loan documents, until the deal closes (or doesn’t). At that point, the money is either returned to you or applied to the down payment. If one of the parties has backed out of the deal in a way that breaches your contract, the contract will determine who gets it.
The third party holding your money is your escrow officer. This could be an attorney or a title company. This should always be an impartial entity—someone who is not representing the buyer or the seller.
Generally, escrow closes once the transaction is complete. At this time the escrow officer will ensure funds are dispersed to the appropriate party and the proper paperwork is filed.
After you’ve closed on your home, an escrow account is used to hold property tax and homeowner’s insurance money until those bills are due.Your annual property tax and homeowner’s insurance premiums are divided up and added to your monthly mortgage payment. Your mortgage servicer collects money every month for your taxes and insurance, and is required to make all payments on or before the due dates set by the government and your insurance company on your behalf. Your total monthly mortgage payment is sometimes referred to as PITI; Principal, Interest, Taxes, and Insurance. Learn more about PITI here.