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Feb 27, 2023

What is Escrow & Why It’s Important

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Home-buying terminology can be somewhat intimidating. What in the world is escrow, anyway? We’re here to answer that question, quickly and painlessly.

Escrow, what is it?

Basically, the term escrow  is a service or account provided by a neutral third-party, such as an escrow company, lawyer or notary, mortgage lender or servicer, or title agent.
Think of it as a method that ensures parties on both sides honor in good faith their commitments and obligations in a deal.

What is the Benefit of an Escrow?

Third parties set or administer escrow accounts for mortgage or construction loans they originate tohold funds, deeds, title papers and other vital documents, until buyer and seller have fulfilled all the obligations under their agreement.  The biggest benefit to an escrow account is that all parties involved uphold the terms they agreed upon.
In that way, escrow is essentially protection, enabling both sides in a transaction to hold the other accountable for upholding their end of the deal. It’s also a mechanism for exchanging funds or other valuable consideration once deal terms and conditions are met.

Types of Escrow Accounts

While many consumers know or have encountered escrow accounts and services when buying or selling a home, what you may not know is how frequently and widespread escrow is applied to a cross-section of industries and transactions.
  • Real Estate Sales Escrow: You’ve made a firm offer to buy your dream home, backed up with an earnest-money deposit that’s immediately put into an escrow account where it remains until closing. Later, if you change your mind and back out of the deal, you may forfeit all or part of your escrow deposit, depending on terms of your purchase contract. If the seller backs out, your earnest deposit is returned to you.
  • Mortgage Escrow: If you’ve ever financed your home with a mortgage, your lender or mortgage servicer – the entity assigned to collect your monthly payment – most likely established an escrow account to hold a portion of your house payment earmarked to cover your property taxes, association fees, and mortgage- and hazard-insurance premiums. Your mortgage escrow balance may fluctuate annually, depending on increases or decreases in your property-tax assessment. If your balance falls into an “escrow deficit,’’ your lender or servicer will raise the escrow portion of your house payment to adequately cover those outlays. Conversely, if your mortgage escrow balance reaches surplus because your lender/servicer overestimated your escrow payouts, you can either keep the surplus in escrow or request the overage be redeemed back to you.
  • Renters Escrow: Landlords usually insist tenants advance one or more months of rent, or that pet owners put up a deposit as security against damage or undue wear and tear. Those deposits are placed in escrow, to be returned in full in most cases to tenants when they move or lease expires.
  • Construction Escrow: Set up like other kinds of escrow accounts, construction escrow is focused on holding and disbursing borrowed construction loan proceeds to general contractors and subcontractors on building projects. Construction escrows usually are administered by title agencies, who aside from paying vendors for their work, watch out for lien filings from unpaid vendors or other parties that could disrupt the project. 

To Escrow or Not to Escrow?

Though escrow accounts are useful tools, they can have limited shelf lives. For instance, once your home equity reaches a certain threshold, you can ask your mortgage lender or servicer to waive the escrow requirement. Large mortgage down payments of 20% percent or more also may qualify you for a waiver.
Doing so, however, means you are solely responsible for paying in full and on time your property taxes, insurance and other escrowed obligations. If you fail to keep up, your lender or servicer can revoke the escrow waiver.
At TruStone Home Mortgage we are committed to helping you navigate your home buying journey by breaking down complicated concepts, especially understanding the concept of an escrow. Still confused? It’s okay. We’re here to help. Visit, call or email us today.
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