What is Escrow?
When purchasing a home, potential buyers often forget about extra costs and tasks apart from just the down payment. One of these, usually mandatory, tasks is the escrow account.
Escrow is in place to protect both the buyer and the seller in the home buying process.
Now, there are two different types of escrow accounts. One is for the home buyers when purchasing, and the other is for taxes and insurance.
For the home buyer’s account, when you’re in the purchasing process, you will usually pay what is known as a good-faith deposit, or earnest money.
The escrow account is in place to hold the earnest money and protect the buyer and seller. Once the transaction is complete, the money will then be taken out of the escrow account and applied to the down payment. But, if the contract falls through, due to the buyer, the seller keeps the earnest money.
In the case that you are building a home, the money will remain in the escrow account until all of the construction has been signed off.
There is such a thing as escrow holdback. Escrow holdback is when the earnest money is held in the escrow account after the completion of the transaction. This happens in situations such as where the buyer agreed to allow the seller to occupy the house after closing or the buyer found something wrong during the final walkthrough.
The mortgage escrow account is an account set up by your mortgage lender that takes a portion of your mortgage payment each month and applies it to your homeowner’s insurance and real estate taxes when they are due. Though this account is not required, it is often highly recommended.