What Is Escrow & Is it Right for You?

When you purchase a home there are costs involved above and beyond the price of the home itself. Keeping track of those costs before the final sale or having funds available for them afterwards can be challenging. Escrow is an account held by a neutral third party that helps home buyers and owners manage those funds.

Typically, there are two different phases of escrow:

• Before you close on your home
• After you become a homeowner and are making monthly mortgage and other payments

Here’s a closer look at both.

Escrow Before You Close on Your Home

After the seller accepts your offer, the title company typically acts as an escrow agent until you close on your home. While your home is “in escrow” before closing, the title company or escrow agent will hold your earnest money – a deposit you make on a home that signals to sellers you’re serious about the purchase – and the seller’s deed, manage title documents, and make sure all the paperwork is signed and notarized.

After closing, the deed is transferred to your name and is recorded in public records. Money is distributed to the seller, as well as any previous lienholders if applicable.

After Closing: Advantages of the mortgage escrow account

Once you take ownership of your home after closing the lender typically will offer to set up an escrow account that you pay into along with each monthly mortgage payment.

The escrow account covers:

• Property taxes
• Homeowners’ insurance premiums, if required

Including those costs in your mortgage payments spreads the costs out over the course of the year. That makes them more manageable for lots of homeowners rather than having to save a large sum of money for property taxes, for example.

When your taxes and insurance premiums are due, your lender will pay them on your behalf from the escrow account or send you the money for payment.

All in all, escrow is a nice safety net to ensure that the homebuying process will proceed smoothly and securely, and that your taxes and payments are paid on time after you become a homeowner.

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