How Does an Escrow Account Work?
When purchasing a home, especially for the first time, it can be confusing to keep track of all of the separate payments required each month. To keep you on track there are various resources that can be set up when you close on your home. One of these resources is an escrow account, which helps you manage funds between all parties involved when purchasing or selling a home.
What is an Escrow Account?
An escrow account is a third party bank account that holds your money during the transition of purchasing a home. It can also be used as a third party account for mortgage payments. Using an escrow account a homebuyer will make lump sum monthly payments which are then distributed to the correct parties.
What Does it Mean to Make an Escrow Payment on Your Mortgage?
When making payments on your mortgage there are a few additional elements that should be considered. These include property taxes and homeowners insurance. An escrow account is a separate third party account that you will pay one lump monthly sum to. Once paid, the bank will then distribute your payment to the correct account or party at the correct time.
What Does it Mean When Your Home is in Escrow?
When closing on your home, you will be placed in an escrow period. When your home is in escrow it means that there are a few steps that the bank, buyer and seller need to take before the sale is final, and there is an escrow account holding the money while these steps take place. When your home is in escrow it could take another month or two before you officially get the keys to your new home. This is because of the list of items that need to be completed before that final step happens. This list includes running a home appraisal, securing the financials for the buyer and seller, doing home inspections and hazard inspections and finally, working out the title and title insurance to transfer ownership. These steps have a lot of moving parts and people involved, so it can take a couple weeks to a couple months depending on how quickly each step is completed.
Overall an escrow account helps you monitor and distribute your mortgage payments. Because of this it typically can reduce your rates because there’s less risk for your lender that your payments will not be sent in on time. Although setting up an escrow account with your lender when purchasing a home can feel like a cumbersome extra step, it’s beneficial in the long run as it helps you manage the payments on your new home.
