What is Escrow?

In many ways, buying a home is a series of midpoints.

At the outset, you’re in the midst of actually identifying a place that you can see yourself living in. When you make an offer on a house, you’re in the “in-between” period of finding out if what’s on the table will be accepted by the seller or if the house will go to someone else who is interested in making the property their very own.

Escrow is the epitome of midway. It’s a state in which your money is held and the amount goes toward various expenses that are related to monthly or annual homeownership payments.

Much like the homebuying process, there are several aspects to escrow so let’s get into the details of what it’s all about.

Escrow, defined

Escrow is essentially a transactional arrangement, in which a particular sum of money is set aside to be put to later use. Those funds are usually held by a neutral third party and are distributed once certain conditions have been satisfied or adequately met. If you’ve heard the term, you’ve probably heard it used with the word “account” as in an “escrow account” or “put your money in escrow.”

This latter phrase means that those funds are being used to pay for some of the incidental expenses that are customary to being a homeowner. These include property taxes, mortgage insurance or homeowners insurance.

When you make your monthly mortgage payment, most of what you spend services the loan itself and the accompanying interest. But it also services a portion of what you pay each year to pay for property taxes in the community where you live, which varies from one location to the next. It also addresses the amount that you spend for insurance premiums.

So when you place money in escrow, it ensures that those mandatory payments are taken care of and it’s done on your behalf, usually by the bank, mortgage lender or escrow agent. Generally speaking, your lender will require you to open an escrow account and will walk you through the process of how that works.

Serves as earnest money

Escrow also serves another purpose. As a current or prospective buyer, it tells the seller that you’re serious about wanting to buy the property. It acts as a deposit, or statement of intent, where in return for the sum of money, the seller agrees to take the house off the market, knowing that you will be the person who intends to buy it once the i’s are dotted and t’s are crossed.

That said, putting up “earnest money,” as it’s called, does not mean you are obligated to buy the house.

If you change your mind, be aware that the seller generally gets to keep the deposit. Otherwise, the money may go back to you or be put toward other uses. For example, it may go toward the down payment on the house, closing costs or other fees associated with homeownership.

Escrow is designed to make the homebuying process easier, smarter and more efficient. If you have any questions about how it works, The Federal Savings Bank is more than happy to help. Contact us today.