Home Buying, What’s Escrow
You'll probably hear the word escrow many times during your home buying transaction, and the term can be confusing, because it is used to describe different events that take place before and after the real estate settlement, the day of closing when the property becomes yours.
Let's take a look at the definition of the term escrow.
Escrow: Documents or something else of value, often money, held by a neutral third party in order to be used at a later date to fulfill an obligation.
Escrow During the Home Buying Process
Earnest Money Deposits If you are buying a home, your first exposure to escrow was probably associated with the earnest money deposits that accompanied your offer to purchase the house. That money likely went into someone's trust account, where it will remain , protected by that neutral third party, until it is credited to you when the transaction closes (or is dispersed in other ways if the transaction fails to close).
Escrow Agent You'll hear the term escrow used to describe the title company, attorney or another person who is hired to handle your closing transaction. That person is often called an escrow agent, because she maintains all documents and funds related to the transaction until the day of closing.
Lender Escrow Accounts The term escrow is used again to describe accounts your lender sets up in order to pay your home insurance and property taxes when they become due. Remember the initials PITI? You saw them when the lender calculated your projected monthly payment. Those letters stand for the components of each payment:
o P, Principal
o I, Interest
o T, Taxes
o I, Insurance
Tax and insurance bills are typically sent directly to your lender. Both of those bills are paid annually, but most lenders require you to pay 1/12th of the annual bill each month. The lender deposits the partial payments in an escrow account, where they'll accumulate until it's time to pay your taxes and insurance the following year.
You'll begin funding your your escrow accounts by making a payment into them at closing.