Escrow is a term that is used frequently in real estate, although it has a few different meanings.
The basic meaning of escrow has to do with funds that are held safely in an account for a specific purpose. Escrow accounts are created as a part of real estate transactions (purchases and sales) to ensure that the transaction is completed safely and accurately. Escrow accounts are often used to help real estate holders to plan for large expenses such as property taxes. The following is a description of some of the types of escrow accounts and the typical uses.
Mortgage Escrow Account
If you purchase a home, the group that finances your purchase will have many requirements you need to meet. Often times this includes creating an escrow account for your property taxes. As you are aware, property taxes are only assessed and paid once a year. If a property owner does not plan and budget wisely, this once-annually expense could create a crimp in your cash flows.
To ensure proper budgeting, an escrow account is created which gets monthly deposits from the homeowner. For example, suppose you have purchased a home and you have a monthly mortgage payment of $1,500. It is estimated that your tax bill for the year on your home will be $6,000. Each month, rather than simply paying $1,500 to your bank, you will actually make a payment of $2,000. This monthly payment covers the $1,500 mortgage payment, and the $500 per month required to save up $2,000 for your tax bill.
In addition to taxes, the escrow account may also require you to make deposits to save up for your annual property insurance premium. Depending on the time of purchase and other requirements you may have to make a deposit into the escrow account at the time you close on your home purchase.
Escrow Accounts for Property Purchases
When you are closing a large real estate transaction, you will have a variety of documents to work through and negotiate. As you near closing you will set a closing date which specifies the exact date when the property shall change hands. As you do this you will designate a third party as the escrow holder or escrow agent in order to assure that the transaction goes as planned.
The escrow holder, which may be a title company or other institution, will ensure that both parties have completed and upheld their side of the agreement. The loan documents, tax and insurance statements, title insurance, lien records, etc must all be checked. Once everything is clear the transaction can close. The funds for purchase can then be released from the escrow account and given to the seller.
The Escrow Holder
Remember that the party that holds the money in escrow should be an independent third party, and should not have any kind of affiliation with either party to the transaction. In addition, the escrow holder's role is not to provide advice or opinions. The escrow holder is simply responsible to ensure that the terms of the sale are upheld and that the funds are disbursed as directed. Be sure to pick a good escrow holder for your next property purchase to ensure a safe and timely transaction.