What Is An Escrow Account and How Does It Work?
Zenith
Zenith Greenwood Village, CO
Published on May 26, 2020

What Is An Escrow Account and How Does It Work?

Escrow has been and continues to be one of the most confusing words in the home buying process. Most people hear the term ‘escrow account’ and have virtually no idea what it actually means or how it impacts their mortgage loan even though most homeowners have an escrow account.

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When you acquire a mortgage loan, there are more things that you will need to pay for your house than just your principal and interest. Every home has property taxes, homeowner’s insurance, mortgage insurance, etc. But, you likely won’t make separate payments for each of those things – that is where an escrow account comes in.

Time explains how an escrow account works in both your favor and the mortgage lender’s favor, “An escrow account is essentially a holding tank. During a real estate transaction, the escrow officer—usually a lawyer or title company representative—holds all the important documents and deposits while the buyer and seller work out the details. The escrow officer makes sure the closing goes smoothly and everyone gets paid what they’re owed (including, of course, the escrow officer himself, who typically gets a fee of 1% to 2% of the cost of the home). After the closing, the escrow agent records the deed and title transfer that make the home officially yours. Most transactions involve a second type of escrow account, between you and your lender. Many mortgage lenders hold money in escrow to pay property taxes and insurance. Each month, you pay a portion of the estimated annual costs along with your principal and interest. At the end of the year, the lender adjusts your monthly escrow amount based on the actual tax and insurance bills. If you were short, you’ll generally be allowed to spread the difference out over the coming year. If you paid in too much, the lender will refund your money.” In essence, your lender makes payments for you on your behalf which is a convenience for you and protects your lender because your bills are always paid on time and in full so they do not have to worry about a lien.

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Zenith Greenwood Village, CO
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