What is Escrow?

If you’re starting the home buying process, you’ve heard the term “escrow”. What is that exactly, and how does it apply to buying a home? Escrow refers to an account where money is held by a third party until a certain condition of a situation has been met, then the funds are released to the appropriate party. There are two types of escrow situations you may run into when you are buying a home.

Earnest Money

When you’ve found the home you wish to purchase, the buyer’s agreement typically includes a good faith deposit called “Earnest Money” which is put in an escrow account until the buying process reaches a conclusion. You pay this deposit to show that you are serious about buying the home. If the home purchase continues and is successful, the escrow account holding the earnest money will apply it to your down payment.

Taxes and Insurance

When you purchase a home, your mortgage lender will create an escrow account that is designed to pay the taxes and insurance for your home. A portion of your total mortgage payment every month goes into this account, all year long. It collects there in escrow waiting to pay your taxes and your insurance. When tax time comes at the end of the year the escrow account pays your home’s property taxes. Same goes for your home’s insurance policy. When that comes due, the escrow account pays that bill.

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