When you buy a home, you need to have a familiarity with an "escrow" account. It is used in the sale of most homes, and it is made to protect both you and the seller of the house. 

What is escrow?

When you decide to purchase a home, you will write the owner a check with what is called "earnest money". "Earnest money" is a down payment that indicates your interest in the house. It is put toward the price of the house if the sale is finalized.  That check then goes into "escrow". While the money is in escrow, it's in the care of a neutral third party until the negotiations and requirements of the sale are complete on both sides. The funds are released when the deal is officially closed. 

Why do I need to put the money in escrow?

Putting the money into escrow is for the security of both parties. The seller knows that you are truly interested in the sale. The buyer can rest assured that the buyer can't simply take the money and run. Many things can occur during the sale of a house. If anything falls through, you can rest assured that you will get your money back. 

Is there a charge for escrow?

Rates vary depending on the escrow agent. Typically, the cost is 1 -2% of the sale of the house. You will negotiate with the seller to determine who pays the costs. 

What is a hold-back?

Your lender may recommend a "hold-back" if the sellers request to stay in the home for a length of time or construction is completed. A "hold-back" means that the funds stay in escrow until you can see that everything is as the two parties agreed upon when you move into your new home. 

Why am I still paying an escrow amount on my mortgage?

You may also see that you continue to pay for escrow after the house is yours. The escrow line item on your mortgage is for taxes and insurance on the house. You will pay 1/12 of the payments for the year through escrow. Your lender will do this because they have an active interest in making sure that these payments are made. If insurance and taxes aren't paid, the house could have a lien put on it. Once this happens, the value of the home automatically decreases. Tell your lender if you would prefer to pay these charges in one large amount at the beginning of the year. They may be able to accommodate you. 

Is escrow required?

Escrows are required for most home purchases. The lender may waive the escrow requirement if the buyer puts down more than 20% down payment on the house. 

What now that the house is closed?

Always check your closing paperwork carefully. If you find any mistakes, reach out to your real estate agent immediately to get the mistake resolved. If the closing paperwork looks good, the funds are released to the buyer, and you own a new home! 

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