What is Escrow and Why Do You Need It?

If you’re buying or selling property for the first time, you’re perhaps wondering, what is escrow? And what is an escrow payment? According to escrow mortgage meaning, it is a third-party service that's typically compulsory when buying a home. When a purchaser and seller reach a buying agreement, they choose a neutral third party to act as the escrow agent. 

What is an escrow agent? The escrow agent accumulates earnest money from the purchaser, which is a deposit that’s equal to a small percentage of the sale price. In return, the seller takes the property off the market. Until the final exchange is concluded, both the purchaser's deposit and the seller's property remain in escrow.

What is an escrow payment on mortgage? In this article, we’ll discuss the definition of “escrow” in relation to a mortgage and how it can help improve your home buying or selling experience.

How do Escrow Accounts Work?

What is escrow on a home loan? When you get a mortgage loan from a bank or direct creditor, you also have an escrow account that lets you pay your property taxes and homeowner's insurance payments in good time. Although these overheads are funded on a yearly basis, your creditor will ask you to pay a monthly share towards each cost and accrue the balance in your escrow account. This guarantees that these overheads get funded promptly each year.

Escrow mortgage accounts are compulsory as they reduce the risk of borrowers failing to fulfill their financial commitments as homeowners. Creditors often oblige you to maintain a minimum balance in your monthly escrow payment mortgage account to protect against any unforeseen cost upsurges. The typical rule necessitates a minimum of two months' expenditures on your escrow payment account, however, the limit can be higher on chancier mortgages. Creditors generally appraise your escrow account annually to ensure that the calculated payments are keeping pace with outlays.

Types of Escrow Accounts

There are two types of escrow accounts that are part of the homebuying process.

Mortgage Escrow Account

Also called an impound account, a mortgage escrow account is set up by your creditor to pay certain property-related expenses on your behalf. If your loan includes an escrow account, you will pay monthly installments for taxes and insurance in addition to your monthly mortgage payment. Your mortgage servicer will deposit these monthly installments into the escrow account. Then, your servicer uses the funds to pay your bills when they are due, usually once or twice per year.

Real Estate Escrow Account

Also called pre-closing escrow accounts, these are held by third-party entities separate from both the purchaser and the seller, and are intended to safeguard the interests of both. These accounts keep all funds, instructions, and paperwork essential for the impending real estate sale, including money for the down payment and the deed to the home.

How are Escrow Accounts Managed?

When you borrow money from a bank or a direct creditor, you'll usually be given an escrow account. This account is where the creditor will deposit the part of your monthly mortgage payment that covers taxes and insurance payments. By accumulating a portion of those yearly costs each month, the escrow account decreases the risk that you'll delay your financial obligations to the government or your insurance provider.

Usually, the purchaser (or an agent acting on behalf of the purchaser) will instruct the escrow officer to release funds only when all terms have been fulfilled, title insurance has been issued, and the seller’s deed has been signed. Escrow is not complete until all the conditions have been fully satisfied and all the parties have signed the appropriate documentation.

Benefits of an Escrow Account

What is escrow used for? Escrow accounts provide protection for the seller, purchaser, and lender in a real estate transaction by guaranteeing that no funds or property are transferred until every escrow term is fulfilled.

For instance, an inspection shows that plumbing repairs are required, which the seller agreed to as an escrow condition but does not actually complete. As the funds are held in the escrow account, the purchaser has the power to stop the sale process if the repairs are not completed.

Some of the key benefits of escrow accounts are:

  • Home Buying: An earnest money deposit should remain in an escrow account to protect both the purchaser and seller.
  • Monthly payments: A homeowner might make deposits into an escrow account with each monthly payment, helping to smooth out large yearly expenditures. 
  • Tenants and landowners: Escrow accounts can help safeguard the interests of tenants and resolve disputes. 
  • Purchasing goods and services: Escrow is an option for almost any transaction where purchasers and sellers want an arbitrator to watch over payments.

Still wondering, what escrow is for a mortgage? Whether you are buying a home or selling one, understanding how escrow works can be overwhelming. With Main Line Homes by your side, you don’t have to worry. 

We use the hottest industry technologies to allow for the up-to-date tracking of market listings. We can help you find homes for sale in the best Philadelphia suburbs including Bryn Mawr, Gladwyne, Haverford, Villanova, Wayne, and across the entire Main Line region. Get in touch today!