Real Estate Agent with Ebby Halliday Realtors

Understanding the lingo - escrow

During the process of buying your home, you'll hear the word escrow thrown around. It's easy to get confused because the term can refer to different things that occur at different times.

If you've made an offer on a house, you have most likely been exposed to an escrow account-perhaps without even knowing it. Typically, a buyer must put down some earnest money, or "good faith" money, when submitting an offer. This tells the seller that you're serious about purchasing his house. This money is placed into an escrow account and is held for the seller. At this point, the transaction is said to be "in escrow."

As a buyer, you want assurance that no funds will change hands until the appropriate time, and the seller wants to know that the money is available. The keeper of the money, often called the escrow agent, is obliged to guard these funds while they are in her possession and to distribute the monies only if certain conditions have been met.

Another time that you may encounter the term escrow is when you're dealing with your property taxes and your insurance. In most cases, there are four components to the monthly payment that you make to your lender: principal, interest, tax, and insurance (PITI). Of these four, the latter two are reserved by the lender in an escrow account.

Your property tax and insurance bills are generally sent to your lender and are paid annually by the lender, using the money in the account. The portion of your monthly payment that comprises the tax and insurance is usually just about equal to one-twelfth of the annual amount. This may be a good thing-particularly if you're a first-time homebuyer-for while it increases your monthly payment, you won't find yourself facing a large tax or insurance bill you can't cover at the end of the year.

Additionally, your lender is entitled to keep a cushion in your escrow account. This allows for some unexpected increases to tax and insurance bills in the coming year. Under the Real Estate Settlement Procedures Act, or RESPA, the amount of cushion is limited to one-sixth of the amount paid out of the account in a year.


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