BY **THE PERK LENDING TEAM** | December 4, 2023 | 3-minute read

What is Escrow?

“Escrow” means transferring a thing of value into the care of a neutral third party until agreed upon conditions are met. While you go through the mortgage process, an escrow company holds onto cash involved in the transaction until the transaction has been finalized.

Escrow makes real estate transactions smoother and more secure for all parties involved.

Earnest Money Deposit

When a homebuyer and seller enter into a purchase agreement, the seller takes the property off the market while the buyer obtains financing. If the deal falls through, the seller must relist the property and start the process all over again, which could result in a substantial financial hit.

To protect themselves, the seller will require an earnest money deposit - also called the good faith deposit - which is later applied towards your down payment. This deposit shows that you are serious about purchasing and protects the seller in the event the transaction does not occur.

The earnest money deposit is typically 1% – 3% of the sale price and is held in an escrow account until the closing process is complete.

Ongoing Escrow

There are four components to your mortgage payment – principal, interest, taxes, and insurance. Principal and interest payments are paid monthly, while taxes and insurance are typically paid annually. To simplify the payments, borrowers often choose to wrap all four components into one monthly payment.

The monthly principal and interest portions are sent to whoever holds your loan, while the taxes and insurance portions go into an escrow account. Your mortgage servicer uses funds from the escrow account to pay tax bills and insurance premiums when they are due.

Do You Have to Escrow?

Some clients can waive the escrow requirement. During the mortgage process, your loan officer will determine if you are eligible to waive escrows. Eligibility is dictated by the type of property, loan-to-value ratio, loan type, state laws, and other factors. There is typically an up-front fee equal to a percentage of the loan associated with waiving escrows.

Keep in mind that if you choose to waive escrows, you are responsible for paying your taxes and insurance premiums when they are due. If you fail to make the necessary payments, your escrow waiver may be revoked, requiring you to pay into an escrow account monthly.

Many homeowners find ongoing escrow accounts convenient because they prevent the homeowner from having to come up with large lump sums for taxes and insurance each year. Additionally, lenders prefer the use of escrow accounts as it helps protect their interest in the property until the loan is paid off.

Escrow accounts may seem like just another out-of-pocket cost for you during the mortgage process, but it’s an important safety measure that protects everyone in the transaction. If you’re ready to move forward with buying property, you can get started with application online.