Understanding Escrow

Escrow is a legal concept where a third party holds money or property temporarily until certain conditions are fulfilled. Let's delve into the functioning of escrow across various scenarios:

Real Estate Transactions:

• Purpose: Escrow is commonly used in real estate transactions to protect both the buyer and the seller during the home buying process.
• Good Faith Deposit (Earnest Money): When you’re buying a home, your purchase agreement usually includes a good faith deposit (also known as earnest money). This deposit demonstrates your seriousness about purchasing the home. 
  • If the contract falls through due to the buyer’s fault, the seller typically keeps the money.
  • If the home purchase is successful, the deposit is applied to the buyer’s down payment.
• Escrow Account for Deposits: An escrow account is set up to hold the good faith deposit until the transaction closes.
• Escrow Holdback: Sometimes, funds are held in another type of escrow account beyond the completion of the home sale. For instance: 
  • If the seller stays in the home for an extra month.
  • To cover outstanding bills (e.g., water bill) that the seller is responsible for.
  • For new home construction until all work is completed.

Taxes and Insurance:

• After purchasing a home, your mortgage lender establishes an escrow account to pay for your property taxes and homeowners       insurance.
• Each month, a portion of your mortgage payment is held in the escrow account until tax and insurance payments are due.
• The amount required for escrow can change yearly based on tax bills and insurance premiums.