Escrow is a legal term that refers to a third party holding assets or cash in trust on behalf of two other parties closing a deal or transaction until a transaction is completed.
In the simplest of terms, escrow means keeping money in trust. When two parties make a deal, the paying party can keep the money with a trusted ‘referee’ till the supplying party keeps their end of the bargain. This protects both parties. The seller doesn’t have to worry about the availability of funds, and the buyer doesn’t have to worry about paying for something and never getting it.
Sometimes, the escrow account managers charge fees for their services. Stocks, property, cash, and other assets can be held in escrow. Parties can decide to hold assets in escrow instead of checks or other financial instruments.
Escrow and Real Estate
In real estate transactions, escrow can assure the sellers and the buyers that both parties are committed and sincere. It is often used when the sale of a property depends on certain factors, such as the property meeting inspection standards or approvals from other members of the buying team. Escrow guarantees the availability of funds and limits the risk of being scammed.
If the parties choose to use escrow, then the money is deposited into an escrow account. The seller is confident that the funds are available, and knows they won’t discover the property has been sold to someone else while they await approvals or inspection results.
Escrow can also be used during mortgage payments to house future insurance and property tax funds. In this case, a portion of the monthly mortgage payments is paid into escrow to cover those insurance payments and property taxes. When a mortgage sets up an escrow account, the monthly payments will be higher than for a mortgage without escrow. However, yearly premiums and property tax bills will not arise because they are already in escrow.
Frequently Asked Questions About Escrow
1. What amount is enough escrow on a house?
The escrow on a house is typically a percentage of the total cost held in a third-party account to signify the seriousness of the buyers, usually about 2% of the asking price. Once the money is in escrow, the seller is also expected to take the property off the market and give the proposed buyer access to inspect the property.
2. Is Escrow good or bad?
Escrow is generally good. It prevents sellers from wasting time on unfunded, empty bids and protects buyers from scams. However, sometimes escrow management fees can be cutthroat. Also, sometimes the amount held in escrow may not be enough to offset the risk.
3. How long do you pay escrow on a mortgage?
Escrow payments for mortgages often last as long as the loan. However, not all lenders require escrow funding. Also, some lenders can allow you to stop escrow payments on request if your loan-to-value is 80% or lower and you have made at least 12 timely escrow payments.