The mortgage process comes with lots of different terms and definitions. If you’ve ever heard of escrow and weren’t sure what it meant, we’ve laid out the basics, so you don’t need to feel overwhelmed. Don’t forget to speak to one of our knowledgeable Loan Originators if you have any questions.
Escrow is a legal agreement where a third party holds on to a large sum of money for two other parties until certain conditions have been met. Escrow, when it comes to real estate, is used for two different purposes. The first takes place during the homebuying process. Utilizing escrow accounts can help the buyer do their due diligence on a property like completing inspections, and it helps the seller rest assured that the buyer can go through with the purchase. If a buyer needs to complete an inspection on the house before going through with a purchase, using an escrow account gives each party piece of mind as they go through the process.
The second use of escrow is for taxes and insurance after a property has been purchased. In this case, your monthly mortgage payment increases because a portion of it is dedicated to cover your tax and insurance payments. The downside is that your mortgage payment is higher. However, the benefit is that you won’t have to worry about paying your yearly insurance premiums or tax bills because you’ll be paying for it all year long in your monthly payments.
Some lenders require escrow accounts. If this is the case for your lender and your loan program, there is no getting out of it. For example, FHA loans always require an escrow account while other types of loans like conventional or VA offer the ability to opt out under certain circumstances. If it is not required, you can opt not to have one and enjoy a lower monthly payment, but then you will have to save up to pay those tax and insurance amounts when they are due.
Now you know the basics of escrow. You know that it protects homebuyers and sellers and can provide a convenient way to pay for your homeowner’s insurance and property taxes. When it comes to buying a house, it’s great for protecting both the buyer and the seller as they go through the transaction. And after your purchase, having an escrow account can be really helpful for managing your tax and insurance bills. To learn more about escrow, mortgages, and the homebuying process, or to ask any questions you might have, contact us today. Our Loan Originators are here to help you accomplish your home financing goals.
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