What is an Escrow Account?
Escrow. What is it? Well, an escrow is a bird of the genus Corvus, sometimes known as a raven.
Oh, that’s not what an escrow is? Oh, you mean ESCROW!
Basically, escrow is a legal arrangement in which a third party temporarily holds sums money until a particular condition has been met.
In regards to real estate, escrow is typically used for two reasons:
1. To protect a buyer’s good faith deposit or earnest money deposit so the money goes to the right party according to the conditions of the sale
When a buyer submits an offer to purchase a home it’s usually accompanied by an earnest money deposit. This deposit doesn’t go to the seller or the real estate agent, it’s held by a third party escrow agent, in an escrow account to be used toward the eventual transaction.
2. To hold a homeowner’s funds for taxes and insurance.
Each month, a portion of your mortgage payment will go into your escrow account, and your lender will use the escrow account to pay your taxes and home insurance bills when they are due. This helps the mortgage holder to not have to come up with a lump sum each year for these payments and provides the lender a level of confidence in knowing that your homes taxes and insurance payments are accounted for.
Whether you need to have an escrow account or not can depend on your type of loan and your lender.
Government-backed loan options, like FHA and USDA loans, require an escrow account whereas, some conventional loan lenders can decide if an escrow account is necessary.
Even if an escrow account isn’t necessary, they can still be a good idea. If you don’t use an escrow account, you’ll be responsible for paying property taxes and insurance yourself, so you’ll need to handle budgeting and paying them on time.