Escrow

When you buy a home, you may feel a bit overwhelmed by the amount of paperwork and figures you have to keep track of.  You may also feel confused about what money goes where.

Before the actual transfer of property from seller to buyer, money may be put in escrow.  A third party monitors this account and upon completion of certain contractual obligations, such as passing a home inspection, the money will be deposited into the seller’s account.

Escrow accounts are also used after the purchase of a house.  These accounts are monitored by lenders for borrowers.  Every month, the borrower makes mortgage payments that cover interest and principal.  Lenders also use this money to pay for insurance and taxes, keeping the payments as a deposit so that when these bills are due, they are distributed to the right company or government entity.  Lenders can make money off of escrow accounts.  Lenders might not charge borrowers for the money they keep in escrow accounts, but they can use the money that is not used for taxes and insurance to bolster their profits.

Escrow accounts can be beneficial for borrowers.  First, escrow accounts can help ensure that all of your required payments are made.  And instead of managing due dates yourself, your mortgage lender does it for you.  Also, since you pay each month, you don’t have to scramble for cash at the last minute when your insurance and taxes are due.

It is also good for mortgage lenders have escrow accounts established.  Aside from making money, escrow accounts help ensure that mortgage lenders’ clients stay in good standing.  If a borrower doesn’t have insurance and something bad happens to a property, the lender can suffer substantial losses.  So in some regards, escrow accounts can act as a kind of insurance for insurance.