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Is it a Bird? Is it a Plane? No… it is Escrow

May 15, 2018 - Posted by: Rocky Mountain Credit Union

 

According to Merriam- Webster defines escrow is “a deed, a bond, money, or a piece of property held in trust by a third party to be turned over to the grantee only upon fulfillment of a condition.”

Most often the first time a person encounters escrow is when buying a house. You the buyer find the house of your dreams and make an offer. If the offer is accepted, usually a deposit (earnest money) is made. Some situations require both a deposit and a down payment. For either situation money goes into an earnest money escrow account. This shows the buyer is serious and committed to completing the purchase. Do not make out a check for deposit and/or down payment directly to the seller. 

What Is An Escrow Account?

Escrow accounts are separate from your mortgage account. They have their own escrow account number and are operated by an escrow officer usually through a title company and sometimes a lawyer. This is where your deposit and other associated papers are held until you close on your home.

The escrow officer makes sure that the property title and other paper work is in order.  Other paper work includes items like homeowner’s insurance, mortgage insurance, home inspections, repairs, etc.  The length of time that funds are in escrow is usually four to six weeks. This can vary, especially if there are delays from the seller. These delays might involve home repairs or other details that were part of the purchase agreement.

Once the title company makes sure that there are no liens, judgements, or other encumbrances on the home, title insurance is issued as a guarantee to the lender and you the buyer. For all of this work the escrow officer is paid. The fee is usually 1-2% of the home’s purchase price. These fees are itemized along with other fee details in the closing paper work.

Where Does That Money Go?

Most commonly the money held in your escrow account becomes part of the down payment. Sometimes the money is refunded to the buyer. The least desirable outcome occurs when the buyer does not complete the sale and the escrow funds are passed on to the seller.

Monthly Escrow Account

Monthly payment escrow is usually created when closing upon the sale of your house. This escrow account is set up to collect property taxes, homeowner’s insurance, mortgage insurance, and sometimes flood insurance. This means that you the homeowner do not have to save and pay for these expenses separately. Every month you the homeowner pay a portion of these costs that are detailed in the monthly mortgage statement.  Your mortgage company then pays these expenses from the escrow account. However these expenses are separate from the mortgage itself and are not paying down principal and interest on the home.

Once a year your escrow account is reviewed. This review allows adjustments to be made for any increases/decreases in the areas listed above.  If there is a shortfall of funds perhaps at the end of your first 12 month lending period the homeowner is notified.  Options for paying this shortfall often include a lump sum payment or having the amount spread out for six to 12 months. If property taxes or insurance rates increase as part of a long term plan, adjustment is made to the mortgage statement. The adjusted payment amounts are detailed in an annual escrow statement.

Ask Your Lender

Escrow accounts, other fees, and unfamiliar terms can be confusing during the home buying process and at closing. Do not hesitate to contact your lender for clarification and answers to your questions.

Want to know all things mortgage? Check out this page with Everything You Need to Know About the Mortgage Process (and then some).

 Are you buying or selling a home? Download our guide to everything you need to know about the mortgage process and then some

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