Escrow is one of those words buyers hear constantly during a home purchase, often without anyone stopping to explain it. It actually shows up in two different ways: once while you are buying the home and again every month after you move in. Understanding both can save you confusion, and maybe a surprise, later on.
Escrow simply means a neutral third party holds money and releases it only when certain conditions are met. Neither side can grab the funds early. That protection is what makes escrow useful in real estate, where large sums change hands between people who may not know each other.
When your offer is accepted, you typically put down an earnest money deposit to show you are serious. That money does not go straight to the seller. Instead, it is held in escrow, usually by a title company or closing attorney, depending on how things are done in your area.
At closing, the deposit is credited toward your down payment or closing costs. If the deal falls apart, what happens to the deposit depends on the terms of your contract, which is why it is so important to understand your contingencies before you sign.
This is the part that raises the most questions. Many homeowners wonder why their mortgage company is collecting money for property taxes and homeowners insurance when those bills come from someone else.
Here is how it works. Your monthly payment is often made up of four pieces:
The tax and insurance portions go into an escrow account managed by your loan servicer. When the bills come due, the servicer pays them for you. You will see these amounts broken out on your monthly statement and on an annual escrow statement.
Why do lenders set it up this way? Unpaid property taxes can lead to a lien, and a lapse in insurance leaves the home unprotected. Since the home secures the loan, escrow helps make sure those bills get paid on time. For you, it means no scrambling to come up with a large lump sum once or twice a year. Escrow is required on some loan types and optional on others, depending on your loan and down payment.
Once a year, your servicer reviews your escrow account to see whether it collected the right amount. This is called an escrow analysis.
The most common reasons for a change are a higher or lower property tax assessment and an insurance premium increase. On a fixed-rate loan, your principal and interest stay the same, so any change in your total payment usually comes from the escrow portion.
A good habit is to open your escrow analysis as soon as it arrives and compare it with your latest tax bill and insurance renewal. If something looks off, call your servicer. You can also estimate your full payment, taxes and insurance included, with our mortgage calculator.
Still have questions about escrow or what your payment will include? Talk with a FLO Mortgage loan officer. We are glad to walk you through every line.
A FLO Mortgage loan officer can walk through your options, run real numbers and help you choose a loan that fits.
This article is for general education and is not a commitment to lend. All loans are subject to credit approval, underwriting guidelines and program availability. FLO Mortgage, Company NMLS #1835856. Equal Housing Opportunity.
© FLO Mortgage, LLC. All rights reserved. Company NMLS #1835856.