Escrow, what it is and how it works....

I still deal with my share of First Time Buyers and they often are oblivious to Escrow and I use this item for that reason. I don't remember where or who I got this from but I have been using it for years, it is very helpful and I explain that this is very basic and will be glad to explain further as we move on. Here it is;

Escrow, what it is and how it works

If you've ever made an informal bet with a friend, you may have asked a third person to hold the money until the wager was resolved. When you take out a mortgage to buy a home, you're doing something similar by opening an escrow account.


How it works
When you put money in escrow it is held by a neutral third party (called an escrow agent) who works for both the lender and the borrower. The agent's role is to carry out the instructions agreed upon by both parties. The money is released when all the terms of the agreement are met. Escrow can be involved in anything from multimillion-dollar building projects to purchases made on online auction sites.

When it's used
When your mortgage closes, your lender will usually require you to open an escrow account to cover property taxes and homeowner's insurance. You'll make an initial deposit, followed by payments to the account every month. (Usually these are added to your regular mortgage payment.) The escrow agent will then release these funds as your taxes and insurance premiums come due.

Its purpose
The idea is to protect the lender by ensuring that you pay your taxes and insurance on time. If you default on your property tax, for example, your municipality can put a lien on the house, which would make it difficult to sell. Or if your house burns down and you've neglected to pay the insurance, the lender would be left with no collateral.

How you benefit
Escrow can benefit borrowers by helping them spread insurance and tax expenses evenly over 12 payments. For example, assume your yearly property taxes are two payments of $1,000 each, and your insurance is $400 annually. If you paid these directly, it would mean three large payments a year; your escrow costs, however, would be a manageable $200 a month.

Escrow payments
Your escrow account will have a built-in cushion -- if you miss a payment, the lender must still be able to pay your accounts on time. However, federal law prohibits lenders from requiring more than two months' expenses in escrow. And because your tax and insurance costs will change slightly from year to year, the lender will review and adjust your escrow payments annually.

When escrow may be waived
In most states, the money you place in an escrow account earns no interest for you. For that reason, many borrowers prefer to pay their taxes and insurance directly. Lenders may agree to this if your down payment is more than 20 percent, although some will raise your interest rate slightly to compensate. Once you agree to putting funds into an escrow account, however, it is difficult to cancel it, so make sure you fully understand the arrangement before your mortgage closes.

It's just one of those items that some may glaze over with people and we should never forget the basics. I do hope this may help others to help potential clients in the future, if it helps only one person my post was worth while then.

Posted by

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Patrick Virgilio, Broker Associate, Cal BRE# 01305252

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The information contained in this blog is believed to be reliable and while every effort is made to assure that the information is as accurate as possible, the author of this blog, and its comments disclaim any implied warranty or representation about it's accuracy, completeness or appropriateness for any particular purpose. All information is copywritten and the property of Pat Virgilio. 

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Rainer
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Brian Doubleday
Brian Doubleday - IML RealEstate - Orange County, CA Broker - Ladera Ranch, CA
Ladera Ranch, Foothill Ranch, Lake Forest, Mission Viejo

Thanks for this post, so many people go right through a process and never ask questions when they don't understand.  I have found that if you keep your clients educated, they'll stay your clients longer

Oct 29, 2010 09:00 AM #1
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Rainmaker
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