What is an escrow?

Written By
Luke P
Posted
June 15, 2021

What is Escrow?

Escrow is a third-party service required by most home lenders that securely holds funds and assets on behalf of the buyer and seller until all conditions in a transaction are met. Once both parties have satisfied their contractual obligations, the transaction between both parties can take place. In short, an escrow account is the bridge that connects buyer and seller so you can purchase your home.  

You’ve done all the leg work:

You’ve been house-hunting for months and are finally ready to make an offer. You've researched the neighborhood, school district, and even scoped out the local parks.  

So, now what?

Like most first-time homebuyers, you likely will not pay for your home in cash. You will take out a mortgage and potentially offer an earnest money deposit to the seller. An earnest money deposit is a part of a home down payment that lets the buyer know you are serious about purchasing the home and allows them to take it off the market. Earnest deposits are usually 1-3% of the home sales price, and according to the National Association of Realtors, the average down payment for homebuyers is 12%.  

This is where the home buying escrow account comes into play. As we stated earlier, an escrow account safely holds the buyer’s funds until all conditions in an agreement are met by both the buyer and seller. This account is created and managed by a neutral third-party known as an escrow agent. Escrow agents are usually real estate attorneys, title companies, or participating brokers. Be aware that service fees may be required by escrow agents, usually between 1-2% of final home price.  

In addition to earnest money deposits, escrow accounts hold funds for ongoing monthly mortgage payments after purchasing your home. This is known as the homeowner escrow account. These accounts are usually created and managed by mortgage companies or direct lenders. These lenders will create and manage a borrower escrow account once you obtain a loan from them. This account helps the buyer and lender keep track of property taxes and homeowner’s insurance premiums while minimizing the risk of foreclosure.

Escrow accounts simplify your homebuying experience by giving you one designated location to hold your home-related funds. They provide you security during a transaction with a seller until all contractual agreements are made and allow you to make monthly payments on your property taxes and insurance premiums instead of paying annual lump sums.  

When you purchase homeowner’s insurance, you may be surprised to learn that you can have the full premium billed to your escrow account. A percentage of your monthly mortgage payment will then go to re-fund your escrow account for the next year’s insurance and taxes. Speak with your real estate agent or lender to explore the best options for escrow services for your individual needs.  

About the Author
Luke P
Licensed insurance agent, running enthusiast, rocks a killer mullet.
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