What is Escrow and how does it work?

Everyone who owns a home knows the term escrow, but that doesn’t mean they know what it means. 

In regards to buying a home, escrow is established when the buyer and lender reach a formal agreement and sign a sales contract. This escrow account uses a neutral third-party to manage the funds necessary to complete the transaction. Now that we’ve covered what this term means, let’s dive a little deeper into how it works and why you need escrow.

Why do I need escrow?

Escrow is required when you purchase a home to help protect lenders by ensuring you pay bills like taxes and insurance on time. For example, if your house were to get blown away in a tornado and you had neglected to pay your insurance, the lender would be left with no collateral. Escrow eliminates this issue.

How does escrow help me?

Escrow isn’t just good for lenders, it helps the consumer too. With escrow you are able to spread payments for taxes and insurance evenly throughout the year. If you pay $1200 a year in taxes, you get to pay $100 per month instead of all of it upfront.

How do escrow payments work?

An escrow agent will carry out the terms of both parties involved, both the lender and the borrower. It is their job to manage the money set aside to fulfill the conditions of the purchase. The agent also releases payments as needed for taxes and insurance.

Can my escrow payments be waived?

In some situations, you can get escrow payments waived. If you prefer to pay your taxes and insurance directly you can work with your lender to waive escrow requirements. Typically, only those with more than a 20% downpayment can get their escrow waived.

We covered many questions about what escrow is and how it works, but we know there could be more questions out there. What questions do you have about escrow? Share them in the comments section below and we'll get back to you with an answer!