5 min read Feb 17, 2024

What Is Escrow and What Are Its Benefits?

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Edited By

Megha Mulchandani

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Editor
Edited By

Megha Mulchandani

Editor, Houzeo
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Megha M. is a content editor who loves to play with words. Apart from this, she is a theater artist and a public speaker who transforms into various personas on stage.

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An escrow is a third party that holds funds in a real estate transaction. It is a facility that safeguards the interests of all parties involved in home purchase.

The average escrow fee in America is 1-2% of the purchase amount. Escrows ensure that no funds are released until the conditions of the real estate contract are fulfilled.

⚡ESCROW IS BENEFICIAL FOR ALL STAKEHOLDERS

  • An escrow account safeguards the deposit for the home buyer until the completion of the transaction. It assures that the funds will be disbursed as per the terms mentioned in the contract.
  • Escrow helps manage seller’s funds for property taxes and insurance. It ensures timely payments while providing financial security and peace of mind.
  • For lenders, escrow facilitates the timely payment of property taxes and insurance premiums. It helps protect lenders’ interests as it mitigates the risk of non-payment and maintainance of property’s value.

Why Do You Need an Escrow?

Let’s look at an example to understand why is an escrow account required:

A buyer and seller agree on a purchase price for a house. The mortgage lender will then set up an escrow account for the buyer as part of the closing process. The buyer will make monthly payments into the account.

The lender utilizes funds from the account to pay the buyer’s property taxes and insurance when they are due. Moreover, this ensures proper handling of expenses and aids the buyer in managing homeownership costs.

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How Does Escrow Work?

Here is a step-wise breakdown of how escrow works in a real estate transaction after signing the purchase agreement:

  1. Opening the Account: The buyer and seller select an escrow company or attorney to open an account.
  2. Depositing Earnest Money: The buyer will deposit a percentage of the purchase price in the account as per the contract.
  3. Submitting the Documents: The escrow agent collects and reviews necessary documents, such as the purchase agreement, title documents, and financial details.
  4. Reviewing and Clearing Contingencies: The escrow agent verifies all transaction contingencies mentioned in the contract. These may include home inspections, repairs, and title searches. Moreover, the escrow agent addresses any outstanding liens or encumbrances.
  5. Closing the Sale: The escrow agent prepares the final settlement statement at closing. Furthermore, the final statement has to be signed and reviewed by the buyer and seller.
  6. Disbursement of Funds: The buyer funds and the seller proceeds go into the escrow account. The agent distributes the funds to the respective parties, such as the seller, real estate agents, and lenders.
  7. Title Transfer: The escrow agent ensures the transfer of the property title to the buyer. Also, the local government authority will register the deal.
  8. Closing the Escrow Account: The account is closed once the homeowner’s details are registered. 

Who Manages Escrow Accounts?

An agent or mortgage servicer manages the escrow account. Depending on the transaction, your escrow account would be managed by either of the two:

1. Agent

The agent manages the account as an unbiased third party. They securely hold funds and documents and ensure transaction terms and conditions compliance. Moreover, the agent is crucial in facilitating a smooth and reliable process for all stakeholders.

2. Mortgage Servicers

Mortgage servicers manage loans for lenders and investors. Here are their duties:

  • Collect monthly mortgage payments from borrowers.
  • Manage escrow accounts for property taxes and insurance.
  • Send statements and payment reminders to borrowers.
  • Process and credit received payments.
  • Provide customer service and handle inquiries from borrowers.

What Are Escrow Fees?

An escrow agent or mortgage servicer charges an escrow fee at the time of closing. These fees encompass administrative costs, document preparation, account maintenance, and the handling of funds during the transaction.

📌Contact escrow agents or companies near you to determine the applicable escrow fees.

What Is the Escrow Balance?

If your mortgage has an escrow account, your monthly payment is split into three parts. The first two parts pay off the loan’s principal and interest, followed by a mortgage amortization schedule.

The third part of your monthly mortgage payment adds to your escrow balance. Furthermore, the loan servicer uses this balance to cover the expenses like property taxes and homeowners insurance.

Bottom Line

If you are a new homebuyer, escrow can be beneficial for you. An escrow account helps you set aside funds to cover transactional costs.

Furthermore, escrow saves time, you can put your monthly payments on autopilot mode. This way, you won’t miss any payment deadlines. To start your home search, browse properties online.

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Frequently Asked Questions

How long do I pay escrow on my Mortgage?

You pay escrow on your mortgage for the duration of the loan, as specified in your loan agreement and per the lender requirements.

Is it better to have escrow or not?

Escrow provides protection and security for both seller and buyer, minimizing the risk of fraud or default. It ensures that funds or assets are held by a trusted third party until all agreed-upon conditions are met.

Does escrow pay property taxes?

Yes, escrow accounts pay property taxes. The agent or loan servicer collects a portion of your monthly mortgage payment and uses those funds from the escrow account to pay property taxes when they become due.

What is an escrow disbursement?

An escrow disbursement refers to the release or distribution of funds held in an escrow account by a neutral third party to the designated recipient.

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