Understanding Escrow Accounts

Escrow accounts and understanding them is key if you’re considering buying a home in 2023. In this post, we explain how escrow accounts work in the home-buying process, the role of escrow agents, and their importance in ensuring a smooth home-buying experience.

PURPOSE OF ESCROW ACCOUNT

During a home purchase, a homebuyer typically deposits earnest money into the escrow account as a sign of good faith and commitment. The escrow agent holds this money until the closing process is complete.

Homeowners can use escrow accounts to manage property taxes and homeowners insurance payments. They can deposit the monthly mortgage payment into the escrow account. The escrow agent pays the taxes.

Escrow accounts work well for both parties. The seller receives compensation if the buyer fails to fulfill their obligations, such as securing financing or completing necessary inspections. And conversely, if the seller fails to meet their obligations, the buyer can get his funds back that are held in escrow.

INITIATION AND MAINTENANCE OF AN ESCROW ACCOUNT

When buying a home, you’ll select an escrow agent or title company to hold and manage the funds for the home purchase. The escrow agent will also review the purchase agreement, title documents, and loan papers and get all parties to sign the required documents.

Before releasing any funds, the escrow agent will finalize all the conditions. After reviewing the terms, the escrow agent releases the funds held in escrow to the seller, lender, and other involved entities.

At the same time, a homeowner will have ‘prepaid costs’ involved. These include the initial escrow deposit, real estate property taxes, homeowners insurance premiums, and mortgage interest.

There will also be prepaid interest charges due at closing for any daily interest on your loan between the closing date and the first monthly mortgage payment date. Escrow accounts help homeowners to manage these expenses more effectively by giving the homebuyer smaller monthly amounts rather than one large bill.

CLOSING OF ESCROW ACCOUNT

The escrow account may be closed after paying off the mortgage, refinancing, or selling the property. If you’re still paying the mortgage, you must ensure you make the final payment. For refinancing, the new lender can handle the payoff process.

You should submit documents or requests to your Mortgage Loan Originator or escrow agent to close the account. Again, remember to continue paying the mortgage until the account closure date.

If you have funds left in the account after closure, your agent will send them to the appropriate parties. You can ensure a smooth closure by coordinating with your Mortgage Loan Originator and escrow agent.

MORE ABOUT ESCROW ACCOUNTS

Escrow accounts hold funds for home purchases and property taxes, and insurance. They protect buyers and sellers, help budget expenses, and when a home is sold then the escrow account is closed.

Understanding escrow accounts is crucial to creating a fantastic home-buying experience. At HDA Insurance Brokerage, our alliance of National Insurance Carriers will help you insure your home.  We’ll find the best Homeowners or Landlord Insurance Policy for you and your family’s needs.