When buying a home—especially if it’s your first time—there are a lot of steps to follow and terms to learn. However, the more you learn before you buy will help make the process easier and less stressful. That’s why we write these blogs for you. It helps to be informed. One of the most common questions we get asked by first-time homebuyers is: What is Escrow?
Escrow is used most often in banking, law, intellectual property, and real estate, but it has the same basic definition. Escrow is when an independent third party takes hold of an asset until a contract between two parties (a payee and payer) regarding the asset is fulfilled. When the contract is fulfilled, the asset is given to the payee by the escrow holder on behalf of the payer. In real estate, escrow works in three different parts of the home buying process, but functions the same way. They break down as follows.
Escrow and lending
Escrow payments to your mortgage lender deal with payments on top of the principal and interest on the loan: property taxes and homeowner’s insurance. Mortgage lenders have a vested interest in making sure your loan is paid, so they take the extra payment for the taxes and insurance, hold and authorize it, and make sure they are distributed to the proper proper entities.
Escrow and making an offer
A potential home buyer tours a for-sale house, likes it, and submits an offer to the seller. The seller agrees to the terms of the offer, so the seller’s agent draws up a contract to finalize the deal. The buyer then submits the payment for the home to an escrow company to hold onto until the contract is completed and signed by both the buyer and seller. When the contract is signed—indicating both parties have received what they wanted and are happy—the escrow company releases the payment to the seller to fully complete the transaction.
Escrow and closing
When you are close to paying off your mortgage (Kudos, by the way!) you will hear about the process of “closing of escrow”. This means that all of the conditions of paying back the mortgage loan have been (or are about to be) completed. When this process happens, an escrow officer will oversee the final payment, record the closing, and file the paperwork indicating the completion of the contract. Now, you can enjoy living with no house payment!