Bringing You Up to Speed About “Escrow”

Jan 15, 2021 • Our Blog
Bringing You Up to Speed About “Escrow”

Buying a home will introduce you to many terms you have never heard before, from LTV to DTI to Escrow and beyond. Before buying a home, you may have never heard the word “escrow”. Most homeowners today do not totally understand what it is, but they know it helps them pay taxes every year. Understanding escrow will explain a large part of the closing process and how your mortgage payment is itemized.


What is Escrow?

Think of escrow as a neutral third party in the mortgage transaction that collects the funds of both the parties in the real estate purchase transaction.

This includes:

  • Appraisal fees
  • Lender fees
  • Title fees
  • Escrow fees
  • Property taxes
  • Home insurance
  • Down Payments
  • Funds

These are then distributed to the appropriate parties after fulfillment of the contract. This protects all the parties involved in the transaction and allows the home buying process to conclude smoothly.


Are There Fees?

Escrow companies provide a service. They generally charge a fee of 1%-2% of the final purchase price. It is typically paid by the buyer of the property. This expense is taken at closing and will be included in the Cash-To-Close on your Closing Disclosure.

The only money you will deposit into an escrow account before you close on your new home is the Earnest Money Deposit. It will be applied to your down payment but can be forfeited if you do not close on the transaction.


Pros of Escrow

Escrow will be behind the scenes of your entire transaction. Most loan programs require an escrow account. Without an escrow company, it may be difficult to buy a home. Buying and selling a home is a huge transaction that requires a large amount of trust on behalf of both parties.

Escrow allows you to:

  • Trust that you will not lose your money if the other party does not follow through
  • Provide an easy way to pay the numerous parties involved in the transaction
  • Ensure you pay your taxes and stay in good standing with the IRS 

Escrow after Closing

After you close on your home loan, your relationship with Escrow will not be finished. You will maintain an escrow account that is managed by your mortgage servicer. They will deposit the taxes and insurance portion of your monthly payment and ensure that you do not fall behind on any of these payments. This means that you do not have to worry about saving for these expenses, and you can sleep safe knowing you are protected.  

If you have questions about escrow or any other part of the loan process, click here and schedule a time to speak with our loan officers. They can explain the process from start to finish and how it affects you personally.