If you are thinking about applying for a home loan, there is one word that is going to come up over and over again: escrow.
So, what is escrow in a mortgage, and what do you need to know about mortgage escrow? There are some situations where this could be beneficial, and there are other situations where an escrow account might be required. Look at a few important points below, and do not hesitate to reach out to a professional who can assist you.
What is Escrow?
Regarding the escrow meaning, this is a legal concept that involves a financial agreement, whether that is money, or assets held by a third party on behalf of two other parties. If there are two organizations or entities that are completing a transaction, it is possible that there might be a third party involved in holding the money and dispersing it to other people.
For example, if you are in the process of purchasing a house, and you need to get a home loan to buy that house, a lawyer or escrow officer might be responsible for holding onto all of the money involved in the transaction. Then, the lawyer or escrow officer will be involved in distributing the money to each of the responsible parties. The goal is to make sure that everybody gets their fair share and nobody is left waiting for somebody else to finance any portion of the project.
In general, an escrow agent manages the escrow. In the example above, the lawyer will act as the escrow agent. The agent is only allowed to release the funds when all of the contractual obligations have been completed. That is important for avoiding any delays in the process, and it prevents the process from going to court. There are numerous assets that can be held in escrow. A few examples include money, securities, funds, and numerous other assets.
Buying a Home with an Escrow Account
If you are thinking about buying a house in the near future, an escrow account will probably be involved in the transaction. The first time you will run into an escrow account is when you are asked to put down earnest money or due diligence money for the transaction. Then, the escrow account is going to play a role during the closing process.
Before you can put the house under contract, you need to put down your earnest money. This money is not going to go to the seller, but you will have to send this money to the lawyer or the title/escrow company. Then, the lawyer or escrow officer will hold it in the escrow account on behalf of the seller. In some cases, the lawyer is not going to cash the check until the sale goes through. That way, you don’t have to worry about the seller cashing your check and then the deal falling through. In some cases, you may get the money back if the sale falls through, and if the check hasn’t been cashed, then there is no harm done. In exchange for you putting down your earnest money, the seller will probably take the property off the market.
Then, when you close on the house, you may have to put more money into the escrow account. For example, it is not unusual for someone to be required to pay for the home insurance on the house for the remainder of the year. You may also be required to pay up all of your property taxes through the end of the year at the time of the closing. This money is typically held in an escrow account that the lawyer or your lender/loan servicer runs. Then, when those bills come due, the lender/loan servicer will simply pass that money onto the final entity. This is a way to make sure that everyone gets their money and that you do not fall behind on your bills.
Pros and Cons of an Escrow Account
- Homebuyers: For a homebuyer, the escrow account can help them build up the money they need for home insurance and real estate taxes. That way, they don’t have to worry about paying everything at once at the end of the year. It could help them budget more accordingly by dividing larger payments into smaller payments spread out during the course of the year.
- Homeowners: As a homeowner, it is helpful to have an escrow account as well. It can provide you with a source of protection if you are interested in putting your house on the market. You don’t have to worry about tracking down the individual parties involved in the transaction, as there is usually a real estate attorney who handles everything for you.
- Home lenders: Home lenders also like to use escrow accounts. If you do not have the money to pay all of your real estate taxes and home insurance upfront, it is a significant risk to your home lender. You could foreclose on the home, which means that you are no longer able to pay back your mortgage. The lender could lose a significant amount of money, which is why they like setting up an escrow account on your behalf. An escrow account can also prevent your home insurance policy from lapsing, which provides the home lender with a lot of protection as well.
There are also a few drawbacks that you should know. They include:
- Homebuyers: If you are in the process of purchasing a home, you may not like the idea of having an escrow account. You may have to pay a significant amount of money in the form of earnest money or due diligence money before the sale of the house has been finalized. It can also make it harder for you to figure out exactly how much money you have to pay at closing.
- Homeowners: As a homeowner, you may not like the idea of having to pay home insurance premiums and taxes every month. This can make your mortgage payment appear higher, and you may not know exactly how much money is going towards the balance of your loan. In addition, you may not get the opportunity to pay for these items with a credit card, which could cause you to lose out on some rewards. You might not even realize that you are overpaying for your taxes and home insurance, which means that you may have to wait until the end of the year to get your money back.
- Home lenders: The home lender may not like using escrow accounts either. They often have to pay additional fees depending on the platform they use. They also have to hire additional employees to manage them, which can drive up their overhead expenses.
These are just a few of the most important benefits and drawbacks that you need to keep in mind if you are interested in taking out a home loan with an escrow account. Unfortunately, you might not have a lot of say regarding whether you use an escrow account or not. It may be required if you decide to take out a home loan, and it is virtually required for all real estate transactions because of the size of the finances involved.
Count on Griffin Funding To Help With the Homebuying Process
There are plenty of home loans out there. It is important for you to understand how an escrow account is going to play a role in all of them. You also need to think about the benefits and drawbacks of each loan option before you decide what is right for your needs.
At Griffin Funding, we have experience working with a wide variety of home loans. For example, we can help you if you are interested in qualifying for FHA loans, a VA home loan, or an adjustable-rate mortgage. We can even help you take out a reverse mortgage if you already have a significant amount of equity in your home.
We understand that everyone is different. The right home loan for one person is not necessarily going to be the right home loan for someone else. That is why you need to work with a professional company that will always put your needs first because we understand that there is a lot of jargon involved, and we will translate it for you as the process moves forward. That way, you understand exactly what you have to do if you want to qualify for the best terms possible on your home loan. If you are ready to buy a house, you need to make sure your finances are in the right position. It would be our pleasure to work with you, so contact us today to speak to a member of our team.