What Is Escrow?

Make sure you understand what escrow is and how it works to decide if it’s the right choice for you.

Family reviewing escrow account.

Escrow is kind of like a financial “safe zone,” where a neutral third party holds and transfers funds associated with real estate transactions. Typically, there are two different phases of escrow: before you close on your home, and after you become a homeowner and are making monthly mortgage and other payments.

Escrow Before You Close
After the seller accepts your offer, the title company typically acts as an escrow agent until you close on your home. While your home is “in escrow” before closing, the title company or escrow agent will hold your earnest money and the seller’s deed, manage title documents, and make sure all the paperwork is signed and notarized. After closing, the deed is transferred to your name and is recorded in public records. Also, the money is distributed to the seller, as well as previous lienholders if applicable.

After Closing: The Mortgage Escrow Account
Once you take ownership of your home after closing, the lender typically will offer to set up an escrow account that you pay into along with each monthly mortgage payment. The escrow account covers property taxes and homeowners insurance premiums, if required. When your taxes and insurance premiums are due, your lender will pay them on your behalf from the escrow account, or send you the money for payment.

All in all, escrow is a nice safety net to ensure that the homebuying process will proceed smoothly and securely, and that your taxes and payments are paid on time after you become a homeowner.

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