Escrow, an amount of money or property granted to somebody but held by a third part and only released after a specific condition has been met.
So what exactly does this term mean in the world of Real Estate and mortgages? In an article provided by LendingTree, escrow and how it works in terms of buying a house is discussed.
How does it work?
Money put in escrow is held by a neutral third party who works for both the lender and the borrower. The third party’s role is to carry out instructions agreed upon by both parties and releases the money when all the terms of the agreement are met. Escrow can be used in a wide range of situations, from million-dollar building projects to purchases made on online auction sites.
When is it used?
Your lender will usually require you to open an escrow account when your mortgage closes to cover property taxes and homeowner’s insurance. You will make an initial deposit that will be followed by payments to the account every month. These funds will then be released by the escrow agent as taxes and insurance premiums come due.
What is the purpose of escrow?
The idea of escrow is to protect the lender by ensuring that you will pay your taxes and insurance on time. For example, if your house burns down and you’ve neglected to pay the insurance, the lender would be left with no collateral.
When can escrow be waived?
Money you place in an escrow account usually doesn’t earn you any interest. For this reason, many borrowers like to pay their taxes and insurance directly. If your down payment is more than 20%, lenders may agree to this, but some will raise your interest rate slightly to compensate.
Your escrow account will have a built-in cushion; meaning if you miss a payment, the lender must still be able to pay your accounts on time. Federal law does prohibit lenders from requiring more than two months worth of expenses in escrow. Your lender will also be required to review and adjust your escrow payments annually.
It’s important that you understand exactly how an escrow account works, because for many, once an escrow account is agreed upon it’s difficult to change it. Make sure you explore all options and fully understand prior to your mortgage closes.