• Resources
  • Privacy Policy
Prime TitlePrime TitlePrime TitlePrime Title
  • Services
    • Home Buyers
    • Home Sellers
    • Real Estate Agents
    • Lenders
    • Builders & Contractors
    • Commercial
  • Team
  • Blog
  • Contact
  • 337.235.0047

Escrow Explained: What It Is & How It Works

NextPrevious

Escrow Explained: What It Is & How It Works

By Paul Gardner | Industry Topics | Comments are Closed | 5 October, 2021 | 0

Escrow. It’s a term used often by real estate agents and lenders during a real estate transaction. 

As a homebuyer, if you are confused about what exactly it means to put money into escrow, you are not alone. Here’s a basic breakdown of what escrow is and how it works when buying a house. 

Escrow is a legal agreement in which a third party controls money or assets until particular conditions are met, reducing risk on both sides of a transaction. In real estate, escrow accounts are typically set up for two reasons: 

1. To hold earnest money. When the buyer and seller reach an agreement on a purchase, the escrow agent collects the earnest money from the buyer and holds it in the account until the closing is complete. The money is then applied to the down payment. Putting it into escrow eliminates uncertainty over whether either party will be able to meet their contractual obligations. 

2. To hold money for future tax and insurance payments. After a home purchase, the lender may establish an escrow account to pay for annual property taxes and insurance. The lender takes a portion of the monthly mortgage payments and deposits it in an escrow account until those payments are due, then pays the bills. Putting that money into escrow ensures the buyer has the funds needed to make those payments. 

While you have no choice about putting earnest money in escrow, you may have a choice about putting your tax and insurance money in escrow depending on the type of loan you secure. 

Banks usually use the loan-to-value ratio to determine if a conventional loan will require an escrow account. Borrowers with mortgage amounts at 80 percent or less of the home’s value can typically opt out of escrow. Those with less than 20 percent are required to have an escrow account. Borrowers who secure Federal Housing Administration (FHA) loans and Veterans Affairs (VA) loans are also required to have an escrow account for taxes and insurance. 

Keep in mind that while it may not be required, putting that money in an escrow account on a monthly basis may be a more convenient way to meet the annual obligations of these large-sum payments. The amount is broken up into smaller, more manageable chunks which can help you better manage the finances. 

That said, putting taxes and insurance money in escrow means your monthly mortgage payments will be higher. Also, escrow is reassessed each year which means you may have a new estimate each year depending on if you were short on funds or had excess money in the account.

In the end, whether or not you have to put money into escrow will depend on the terms of your purchase agreement and the requirements of your lender. It’s just another aspect of a real estate transaction that is helpful to understand before you get too far along into the process of buying a home.

Escrow, Realtors, Title Industry, Title Insurance

Paul Gardner

Paul’s core practice centers on the examination of title and real estate transactions. He has extensive litigation experience, and has spent several years representing and advising lawyers, real estate agents, and insurance agents in connection with professional liability claims.

More posts by Paul Gardner

Related Posts

  • Benefits of a Realtor and Title Company Working Together

    By Paul Gardner | Comments are Closed

    The last step in the real-estate transaction process – the closing – is the most important one, but the one for which the Realtor is usually most out of their league. That’s why they needRead more

  • What To Know About The Fed Interest Rate Hike of 2022

    By Paul Gardner | Comments are Closed

    Inflation in the U.S. is higher now than it has been in 40 years with little indication of letting up, which is why the Federal Reserve made the decision to raise its benchmark interest rateRead more

  • Most Popular Home Improvement Projects for 2022

    By Paul Gardner | Comments are Closed

    The pandemic forced people to spend more time indoors at home over the last couple of years. As a result, many took on home improvement projects. That trend looks to continue in 2022. Here areRead more

  • How Property Taxes And Insurance Can Affect Your Mortgage

    By Paul Gardner | Comments are Closed

    Did you know that your mortgage payments may fluctuate? Homeowners are often surprised when their monthly payments change, but it’s a relatively common occurrence due to changes in property taxes and insurance premiums.  When youRead more

  • Property Taxes Explained

    By Paul Gardner | Comments are Closed

    Property taxes are an inescapable part of home ownership that everybody buying a home should understand before they close. They can be quite high depending on where a home is located, so knowing what theyRead more

NextPrevious

Contact Us
Request Fees
Title Request

Blog Categories

  • Announcements
  • Events
  • Industry Topics
  • Lagniappe
  • Uncategorized

Newsletter

  • This field is for validation purposes and should be left unchanged.



1819 W. Pinhook Road, Suite 100
Lafayette, LA. 70508

337.235.0047
Contact Us

Services

  • Home Buyers
  • Home Sellers
  • Real Estate Agents
  • Lenders
  • Builders & Contractors
  • Commercial

Site Links

  • Blog
  • Team
  • Contact
  • Resources
  • Privacy Policy
  • Title Request

Newsletter

  • This field is for validation purposes and should be left unchanged.

  • Services
    • Home Buyers
    • Home Sellers
    • Real Estate Agents
    • Lenders
    • Builders & Contractors
    • Commercial
  • Team
  • Blog
  • Contact
  • 337.235.0047
Prime Title