What Is Escrow, And Why Should You Care?

The process of buying or selling a home comes with many different complicated terms you may or may not have had the opportunity to fully understand. Among those is the concept of “escrow”, which you’ve probably heard before. However, do you really know what escrow involves? How does escrow impact you as a seller, and should you be wary of it or not? Let’s talk about what escrow is, and why you should care. 

Escrow explained

Escrow is a process where two parties use a third party to hold money or assets for a transaction until the transaction has been finalized and the funds can be disbursed to the correct parties. In real estate, escrow is traditionally used to protect a buyer’s deposit, also called “earnest money”, so the money only goes to the right party if the conditions of the sale are honored. 

When a buyer makes an offer on the home you wish to sell, and you accept the offer, the buyer will come up with earnest money which is deposited into an escrow account. This typically allows buyers to show sellers they are serious about their offer, and prevents the homeowner from selling the property to someone else.

Once the seller has accepted the offer, escrow can also be used for mortgage purposes. The buyer’s lender may create an escrow account to retain a portion of their monthly payment until tax and insurance payments are accounted for. 

The advantages and disadvantages of escrow for homeowners

Though escrow sounds like a good idea, simultaneously protecting the buyer, the seller, and the lender, it can get complicated. Sometimes, funds are held in escrow after the sale of the home, which is called an escrow holdback. Furthermore, escrow accounts are not free. They often result in higher mortgage payments, because they are funded through monthly mortgages. 

Mortgage escrow can vary year by year

The amount needed for mortgage escrow depends on property taxes and homeowners insurance rates, which can vary yearly. Buyer’s lenders will decide on the amount required according to their previous year’s bills. However, when they first move into their new home, their property will be reassessed, which might increase their property taxes. This happens if the home’s value has risen over time. Because of the increase, escrow may come up short, which means buyers have to pay the difference out of pocket. Similarly, escrow is reassessed each year, and mortgage payments could go up because taxes and insurance premiums are subject to frequent change. 

Extra closing costs

Mortgage lenders require borrowers to “cushion” their escrow account when closing the sale with a precise amount of months’ worth of taxes and insurance, depending on the time of year, thus the amount of taxes left to be collected. Therefore, having an escrow account can add several hundred or thousands of dollars to the closing costs on the sale of your home. 

Yes, escrow is a very complicated process. Here at Wasy Homes, we can guide you through your escrow process and make things easier for you, without charging a commission. You’ll be able to save on closing costs, and optimize the use of escrow in your real estate transactions, all while not having to give out an average of 6% of your sale price to a realtor. Contact us for help regarding your escrow!