Escrow is a term you will hear when you buy real estate. But it’s something unknown for first-time homebuyers or sellers. So it is important to know what it is, how it works, the benefits, and the disadvantages of having it.
So what is Escrow?
Escrow is a legal arrangement that protects the home buyer and seller. A third-party agent or company is the one that administers it. What do they do? They keep hold of a large amount of money until the fulfillment of purchase of the home or land.
Escrow is also used for two different reasons in real estate. One is to protect the buyer’s money by making sure it gets to the right party, depending on the conditions of the sale. The second reason is for the homeowner to have a safe keep for the funds that will be used for tax and insurance.
How does it work?
When you are buying a home, the Escrow protects your deposit. A deposit is usually made to show serious intent about purchasing the property. The third-party agent holds on to this and makes sure that terms and conditions are met before the money is given to the correct channel.
If the sale falls through because of the buyer, the deposit will automatically go to the seller. But if the deal pushes through, the deposit will turn into a down payment for the house.
Another way an escrow work is if your lender sets one up to pay your property taxes and insurances. Once your deal has closed, and you bought that house, your lender - more commonly known as a mortgage, will keep a part of your monthly mortgage. They will release the money once your dues are up.
Benefits of Escrow
For home buyers, especially first-timers, an escrow will keep your deposit safe. There are some incidents when home buyers give their deposits straight to the seller. And when the deal falls through due to the seller, sometimes they won’t give deposits back.
As for homeowners, an Escrow is beneficial to those who don’t want to worry about not having enough for their dues. You will end up paying for tax and insurance every year, so it’s great to know that you already have funds for it in your Escrow account.
Disadvantages of Escrow
Homeowners are the most impacted by the disadvantages of having an Escrow agreement. One, you will have higher mortgage fees. This is due to the costs needed for your taxes being a part of your monthly mortgage, which means you will tend to pay more.
Another disadvantage is that mortgage and taxes change fees. Whenever you get your Escrow reassessed each year, there are chances that you need to pay more rather than getting a refund.
Bottom Line
Escrow will keep your money safe through a third-party company or agent during a home sale. Although, it may cost you more on mortgage and taxes. It is still the safe and sure way to know where your money is going when it comes to buying or selling a house.
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