What is Escrow? | Questions & Answers
What is Escrow?
Confused about escrow? What does escrow mean?
We're on a mission to help you love where you live, and give where you love! The Orange County housing market may be shifting to a more balanced market, but the home buying process can still feel daunting and expensive, especially for a first-time home buyer. But the biggest misconception about escrow might just be that it is complicated. The concept of escrow is actually rather simple!
What is escrow? There is no need to make the home buying experience complicated. But understanding escrow could be the difference between putting a home under contract and not securing the home of your dreams. Let's take a look at how we can help you successfully navigate your home buying experience.
In general and simple terms, it is the use of a trusted "middle man". It is the intermediary handling money or assets being transferred between two parties, ensuring that the terms of the transaction are met by both sides. Simple enough, right?
We will get into more details below. But in the context of homeownership, escrow can mean two different things. Hence the confusion. What do we mean when we say escrow?
During the process of closing on your home, to hold "earnest money."
Then, as a part of your mortgage payment, as a long-term account that you pay property taxes and insurance into each month.
5 Common Escrow Questions & Answers
Ask your REALTOR® if you have questions and get expert answers. Just because federal law governs certain aspects of escrow, states and banks are allowed to some things their own way. If you are uncertain of how it works, ask us!
What does it mean to be "in escrow"? In the context of buying a home, you are "in escrow" between the time that your offer — with its deposit — is accepted and the day that you close. That time period is usually at least 30 days. The deposit, often called “earnest money”, shows your commitment. That money is held “in escrow”, meaning that the seller does not receive the money until you come to a final agreement on the sale. Then, it is applied to the purchase price. The "middle man" might be an individual escrow agent, an attorney, or a title company.
What is an escrow account? Most homeowners have a long-term escrow account, which is established at closing, and the "middle man" is your loan servicer. What does the escrow account for? An escrow account is used to collect and hold the portion of your monthly mortgage payment that goes toward property taxes, mortgage insurance, and sometimes homeowners insurance. (Keep in mind that not all lenders require homeowners to have insurance payments be escrowed.) The servicer pays these expenses for you from the escrow account. Think of it like a savings account but only your loan servicer can make withdrawals. Do not worry — you do not set this up yourself! That is where we come in with the help of a trusted title agent, attorney, or servicer.
Is an escrow account required? Almost always. Why? Because it protects the lender’s investment. Hypothetically, if you were to fall behind on your property taxes, you could end up with a lien on your home — and you would eventually lose it. As you can imagine, lenders don't like it when someone else has a claim on your property and their investment. But an escrow account offers two benefits to you, too! You are automatically setting aside money for these monthly expenses instead of having to budget for them. Essentially, someone else is managing those tax and insurance bills for you!
Can I earn interest on my escrow account? In California, the answer is yes. Even though most states do not require lenders to pay interest on escrow accounts, California does. However, there can be exceptions for legal reasons, so consult with your trusted real estate experts!
Can my escrow payments increase? Yes. The most common reason for an increase in your escrow account payments is an increase in property tax. If the tax rate goes up, your property value can be assessed. Something to keep in mind —your homeowners insurance premium can increase, too, but most likely with much less impact. Escrow payments tend to be analyzed on an annual basis. Since the amount going into escrow is an estimate, there can be adjustments.
The best advice for a home buyer: ask your real estate agent! You are not in this alone! And, you should rely on the professional guidance and advice of a seasoned REALTOR® to help you navigate the home buying process. That's where we at The Swan Team come in!
If you need help preparing to buy or sell in 2018 – Contact Us Now!
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The Swan Team | OC Real Estate
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