What is Escrow? Everything You Need to Know about Escrow Accounts

What is Escrow? Everything You Need to Know about Escrow Accounts

Buying or selling a home can be a mystifying and complicated process. Especially for beginners in the real estate market, certain terms might be difficult to grasp. There are so many steps to learn, starting with an escrow. So what is an escrow? You might recognize it as a part in the home buying process. But it’s a bit more than that. Today, we’re breaking down an escrow. 

Escrow Definition

To put it simply, an escrow is a legal agreement in which a neutral third party holds something of value, like cash, until the transaction between buyer and seller is complete. It’s assurance that the purchase will be fulfilled smoothly. An escrow exists for two reasons:

  1. To protect the buyer’s good faith deposit 
  2. To hold a homeowner’s funds for taxes or insurance

Everyone on all sides deserves a smooth, protected process! An escrow makes this possible!

Types of Escrow

There are two types of escrow accounts in the home-buying process. The first is a Mortgage Escrow Account, which is sometimes called an impound account. This is set up by your mortgage lender to pay your property related expenses. With an impound account, you’ll be paying taxes and insurance in addition to your monthly housing payment. 

The second type of escrow is known as a Real Estate Escrow Account. This is what we mentioned earlier, and it’s the pre closing of sale account. Again, it’s designed to protect all parties in the transaction process of buying or selling a home. A third party must intervene to further ensure that assets on all sides are safe until the purchase agreement is fulfilled. 

The Purpose of a lender’s impound Account

The reason mortgage lenders want a buyer to have an  impound account is to ensure that they won’t fall behind on payments. A common acronym used in real estate is known as PITI. This refers to the breakdown of expenses you’ll be paying after a purchase. It includes the Principal loan amount, the Interest on the loan you’ve taken out, and remaining funds to cover Property taxes and Insurance. This may sound a little repetitive, but we promise it’s useful! It’s better to be in the know than struggle to remember the bits and pieces of an escrow when it comes time to close. 

We’re aware the details of the escrow process may still be confusing, but we hope this breakdown has given you better insight into understanding this process! We’d love nothing more than to walk you through your escrow process at Meraki Real Estate. Book an appointment with one of our trusted real estate agents today!

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