, What is Escrow in Real Estate?

escrow agreement

Escrow Tips to Get You Through Your Home Transaction

Escrow occurs when a third party temporarily holds a large sum of money or property until a particular condition has been met in a real estate transaction. Escrow protects the buyer’s deposit and holds a homeowner’s funds for taxes and insurance. There are typically two types of escrow accounts: one for the home buying process and the other for the life of your loan. However, escrow accounts don’t cover all the expenses related to homeownership. Read on to learn more details about escrow and how it impacts your home transaction.

Do You Need an Escrow Account?

If you pay for property taxes and insurance yourself instead of using an escrow account, it will lower your monthly mortgage payment. However, you will have to pay for future homeowners insurance and property tax out of pocket. Escrow accounts are sometimes required depending on the loan you use to finance your home:

  • VA Loans: Requires 10% down and a strong credit score
  • Conventional Loans: Requires 20% down or more
  • FHA Loans: Requires all borrowers to have an escrow account

Escrow accounts may be handled by an escrow company, also known as the title company. The escrow company may also be responsible for holding other documents related to the sale of the home for both the buyer and the seller. If escrow is required, the principal and interest of the loan will be included in the mortgage payment, as well as property taxes and homeowners insurance. You can expect to pay about one-twelfth of the total cost of your annual property taxes and insurance every month. This is why an annual escrow analysis is vital. The lender will collect these amounts and make the appropriate payments when necessary.

omehunt.blog.post-what-is-escrow-1.700x400What are the Benefits and Disadvantages of Having an Escrow Account?

An escrow account is key to protecting your deposit during a home sale. It ensures that the buyer has the funds to make the purchase and the seller can remove the house from the market. If you find a problem during the home inspection and want to pull out of the sale, it will be returned to you according to your agreement. An escrow account also allows you to pay for your taxes and insurance over the course of the year. 

The disadvantages of an escrow account are higher mortgage payments and incorrect estimates for the homeowner. Since escrow is reassessed each year, you will receive a new estimate. If you’re short, your mortgage payment will increase, but if you have too much money in the account, your mortgage payment may decrease or stay the same.

Escrow protects both buyers and sellers during the home transaction and can be vital to your home transaction. For more information or to find a lender that can help you, contact HomeHunt today!


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