What Is Escrow?

What Is Escrow?

If you’re new to the homebuying process, there are many terms and processes with which to familiarize yourself. One of those is that of “escrow.” Most people have heard of escrow or are familiar with the phrase “being in escrow,” but aren’t exactly sure what it means, what escrow actually is, or how it works. At United Title, we offer comprehensive escrow services and can help you as you navigate the escrow process. Reach out to us today to discuss our escrow services.

What Is Escrow?

Escrow refers to a legal arrangement wherein a third party holds a large amount of money or an asset on the behalf of two other parties that are in the process of completing a legal transaction. Once the transaction is completed and any specific terms have been satisfied, the money held in escrow can be transferred to the receiving party. 

Escrow in Real Estate Transactions

Escrow accounts are most commonly associated with real estate transactions, although they’re not limited to these types of transactions (they can also be used in any situation where funds will need to pass from one party to another). In a real estate transaction, escrow is most often used when purchasing a home—a buyer’s funds will be held in escrow until the time that they should be transferred to the seller, but it can also be used to hold a buyer’s money to pay for taxes and insurance.

Escrow accounts when purchasing a home 

If you are a buyer in a real estate transaction, you can probably guarantee that your funds will be held in escrow. The escrow account will hold any earnest money that is put towards the purchase of a home. Earnest money is a deposit that a buyer makes to demonstrate their intent to buy a home; if the sale falls through due to the buyer backing out, the earnest money will be transferred to the seller. If the sale goes through as intended, however, then the earnest money will be applied as part of the buyer’s down payment on the home. In the meantime, this money is held in escrow. 

Escrow accounts to hold funds for insurance and taxes 

Depending on how you purchase your home (with cash or with a traditional mortgage loan) and who your lender is, your bank may also set up an escrow account that’s used to pay the taxes and insurance on your property. When a homeowner makes a mortgage payment, a portion of that payment is diverted into the escrow account for taxes and insurance payments.

Does an Escrow Account Cover All of My Costs?

During the homebuying process, only the earnest money is typically deposited into the escrow account—the amount of earnest money required in a home sale is usually between 1-3% of the total home price. This is the only sum of money that is held in escrow until the sale of the home closes, at which point the money will be transferred appropriately (or, if the home doesn’t close, the money will be transferred to the buyer or the seller depending on the details of the purchase agreement).

Note that an escrow account that’s set up by your lender also will not cover all of your costs—just taxes and insurance in most cases. For example, if you have an HOA, HOA fees will not be collected by your lender.

What Are the Advantages and Disadvantages of Escrow?

If you’re purchasing a home, an escrow account is usually unavoidable—earnest money is almost always a part of a buy-sell agreement, and it is almost always held in escrow. However, you may or may not have a lender set up an escrow account on your behalf as part of your mortgage loan. Some of the advantages and drawbacks of escrow include:

Advantages 

  • Protect your finances during a large transaction.
  • Can pay insurance and taxes monthly without having to worry about making separate payments for these things.
  • Is a win for both the buyer and the seller; neither party is at a disadvantage. 

Drawbacks 

  • The only real downside to having an escrow account as part of your mortgage loan is that mortgages that set up an escrow account will have higher payments than those that don’t have this; however, you also won’t have to fret about paying your property tax bills or insurance premiums, as these will be covered under your mortgage. 

Escrow Services from United Title

At United Title, we offer a range of residential title services, including escrow services. To learn more about our company or to ask questions about escrow or the residential real estate process, reach out to us directly by phone at (410) 544-5441 or visit us in person.

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