What is an Escrow account?
In real estate, escrow is typically used for two reasons:
- To protect the buyer’s good faith deposit so the money goes to the right party according to the conditions of the sale.
- To hold a homeowner’s funds for property taxes and homeowners insurance.
What is an Escrow account?
In real estate, escrow is typically used for two reasons:
To protect the buyer’s good faith deposit so the money goes to the right party according to the conditions of the sale.
To hold a homeowner’s funds for property taxes and homeowners insurance.
Escrow Accounts For Home Buying
When you’re buying a home, your purchase agreement will usually include a good faith deposit (also known as
earnest money). This deposit shows that you’re serious about purchasing the home. If the contract falls through due to the fault of the buyer, the seller usually gets to keep the money. If the home purchase is successful, the deposit will be applied to the buyer’s down payment.
To protect both the buyer and the seller, an escrow account will be set up to hold the deposit. The good faith deposit will sit in the escrow account until the transaction closes. The cash is then applied to the down payment.
Sometimes, funds are held in escrow past the completion of the sale of the home. This is called an escrow holdback.
There are many reasons an escrow holdback may be needed. Perhaps you agreed that the seller can stay in the home an extra month, or maybe you found something wrong with the property during the final walkthrough.
If you’re building a new home, money may remain in escrow until you’ve signed off on all the work. Once the conditions are met, the money will be released to the right party.
Escrow Accounts For Taxes And Insurance
After you purchase a home, your lender will establish an escrow account to pay for your taxes and insurance. After closing, your mortgage servicer takes a portion of your monthly mortgage payment and holds it in the escrow account until your tax and insurance payments are due.
The amount required for escrow is a moving target. Your tax bill and insurance premiums can change from year to year. Your servicer will determine your escrow payments for the next year based on what bills they paid the previous year. To ensure there’s enough cash in escrow, most lenders require a minimum of 2 months’ worth of extra payments to be held in your account.
Your lender or servicer will analyze your escrow account annually to make sure they’re not collecting too much or too little. If their analysis of your escrow account determines that they’ve collected too much money for taxes and insurance, they’ll give you what is called an escrow refund.
If their analysis shows they’ve collected too little, you’ll need to cover the difference. You may be given options to make a one-time payment or increase the amount of your monthly mortgage payment to make up for a shortage in your escrow account.
Who Manages An Escrow Account?
Escrow accounts may be handled by a variety of third parties, including an escrow company, escrow agent or mortgage servicer. Where you’re in the process will determine who manages the account.
Escrow Companies And Escrow Agents
When you’re buying a home, escrow may be managed by a mortgage servicing company or agent. The escrow agent or company is sometimes the same as the title company
The escrow company not only manages the buyer’s deposit, but they may also be responsible for holding on to the deed and other documents related to the sale of the home.
Because the escrow company is working for both the buyer and the seller in the real estate transaction, the fee for their services is usually split evenly between the two parties.
Mortgage Servicers
Your mortgage servicer manages your mortgage from closing until you pay off your loan. Mortgage servicers are responsible for collecting your mortgage payment, maintaining the records of payments and managing your escrow account.
Your mortgage servicer is sometimes your originating lender, but not always. Sometimes lenders sell the servicing rights to your loan. It’s a good idea to know ahead of time whether your lender typically services their own loans. Not all mortgage servicers provide the same level of service – and some charge more fees than others.
With your mortgage servicer taking care of your escrow account, there’s not much you have to do. You don’t have to send in your tax or insurance bills – your servicer will make sure they know who to pay, and when.
The only exception is if you change insurance providers or policies. You may need to provide the new policy information to your servicer.
The Benefits Of An Escrow Account
The biggest benefit of having an Inmtec Escrow Service Account is that you’ll be protected during a real estate transaction – whether you’re the buyer or the seller. It can also protect you as a homeowner, ensuring you have the money to pay for property taxes and homeowners insurance when the bills arrive. You’ll find that there are a few other great benefits for home buyers, owners and lenders, too.
For Home Buyers
For Homeowners
An escrow account takes the pressure off you to come up with a lump sum to cover taxes and insurance. Since you’re paying for your taxes and insurance throughout the year, the payments are much more manageable.
Another bonus is that you don’t have to keep track of all the different due dates. When your tax bills and insurance premiums are due, your mortgage servicer will make sure those bills are paid on time, every time. That way, you’re not responsible for any late payments. Your servicer will even cover bills for you if your escrow account is short on funds.
For Lenders
Lenders have a vested interest in making sure your property taxes and insurance get paid:
- If your tax bills don’t get paid, the tax authority could put a lien on your home – which could end up costing the lender money if the tax authority chooses to foreclose.
- If your homeowners insurance coverage lapses, significant damage to or loss of the home could lead to extreme loss of value of the home.
- Having an escrow account on the loan allows the lender to ensure the bills get paid.
- Escrow is associated with real estate transactions, but it can apply to any situation where funds pass from one party to another.
For Home Buyers
For Homeowners
An escrow account takes the pressure off you to come up with a lump sum to cover taxes and insurance. Since you’re paying for your taxes and insurance throughout the year, the payments are much more manageable.
Another bonus is that you don’t have to keep track of all the different due dates. When your tax bills and insurance premiums are due, your mortgage servicer will make sure those bills are paid on time, every time. That way, you’re not responsible for any late payments. Your servicer will even cover bills for you if your escrow account is short on funds.
For Lenders
Lenders have a vested interest in making sure your property taxes and insurance get paid:
- If your tax bills don’t get paid, the tax authority could put a lien on your home – which could end up costing the lender money if the tax authority chooses to foreclose.
- If your homeowners insurance coverage lapses, significant damage to or loss of the home could lead to extreme loss of value of the home.
- Having an escrow account on the loan allows the lender to ensure the bills get paid.
- Escrow is associated with real estate transactions, but it can apply to any situation where funds pass from one party to another.
Understanding Escrow
Escrow is a financial process used when two parties take part in a transaction and there is uncertainty about the fulfillment of their obligations. Situations that may use escrow can involve Internet transactions, banking, intellectual property, real estate, mergers and acquisitions, law, and more.
Consider a company that is selling goods internationally. That company requires assurance that it will receive payment when the goods reach their destination. The buyer, for their part, is prepared to pay for the goods only if they arrive in good condition.
The buyer can place the funds in escrow with an agent with instructions to disburse them to the seller once the goods arrive in a suitable state. This way, both parties are protected, and the transaction can proceed.
Escrow and the Stock Market
Stocks are often issued in escrow. In this case, while the shareholder is the real owner of the stock, the shareholder has limited rights when it comes to the disposal of the stock.
For example, executives who receive stock as a bonus to their compensation often must wait for an escrow period to pass before they can sell the stock. Stock bonuses are often used to attract or retain top executives
Escrow and the Stock Market
Stocks are often issued in escrow. In this case, while the shareholder is the real owner of the stock, the shareholder has limited rights when it comes to the disposal of the stock.
For example, executives who receive stock as a bonus to their compensation often must wait for an escrow period to pass before they can sell the stock. Stock bonuses are often used to attract or retain top executives