What is Escrow?
Escrow means that you’re using a “third party” (somebody who is neither the Buyer nor Seller) to hold something of value, which helps to make your transaction safer.
Ideally, this would be a neutral third party. The job of an Escrow Service company is simply to ensure that everybody sticks to their end of the bargain and facilitates the agreed upon contract details.
When you sign an agreement to buy or sell something, you agree to do certain things: the Buyer will pay the agreed upon amount by a certain time, and the Seller will provide the asset or title for what is sold. Of course, most transactions are more complicated than that.
Who is the “referee” when you sign a complicated agreement? An Escrow Agent can provide that service – ensuring that everybody does what they agreed to do, and acting as a middleman to safeguard assets in the process.
That’s why it’s important to use a trusted third party administrator!
Real Estate Escrow
Real Estate Escrow is the sale and purchase of a residential home or commercial property. Escrow opens when a signed agreement is delivered to an Escrow Agent, who helps to ensure that the conditions of the contract are all satisfied.
Escrow closes when everything is paid in full and the property title ownership is transferred to the Buyer. There are usually two closings, one at the time of signing the Bond for Deed contract, and one when the title and ownership transfers.
Perhaps the first time you’ll notice escrow in a home sale is when earnest or down payment money is paid. The Buyer writes a check payable to the Escrow Company, who will either refund the money, apply it to the purchase price, or pass forfeited funds on to the Seller (if the Buyer fails to meet any requirements). If the check was instead payable directly to the Seller, the Buyer would take a significant risk – what’s to stop a dishonest “Seller” from cashing the check immediately and making it difficult for the Buyer to complete the purchase?
After the details are outlined to an Escrow Agent for service in a contract, the Buyer and Seller simply need to do what they agreed to do.
When you make your “monthly housing payments,” you might pay for more than just your home loan of Principle and Interest (P&I). Expenses such as homeowner’s insurance and property taxes might be included into the payment as well.
Insurance premiums and property taxes are often annual expenses. Sellers and Lenders aren’t always confident that Buyers will budget for those expenses properly. If you don’t make those payments, the Seller or Lender is at risk, so ensuring that those expenses get paid is often part of your monthly housing payment called Escrow or Taxes and Insurances (T&I)
With an escrow account, the monthly portion of those expenses added to your monthly payment and deposited into a separate account. Each year, when your insurance or tax bills are due, the money in that account is used to pay the bills (your Escrow Agent handles this for you). So once again, the escrow account is money held by a third party (not you or your Seller) to make sure that obligations are met.
Premiums for Homeowner’s insurance and property Taxes may increase. Therefore, your monthly housing payment will also increase accordingly.