Escrow Account
Definition:
An escrow account is a financial account held by a third party (escrow agent) to manage funds for specific purposes, such as property taxes and homeowners insurance, during a real estate transaction or after closing. In a home purchase, the escrow account temporarily holds the buyer’s earnest money until the sale is completed. After the purchase, lenders often require borrowers to maintain an escrow account to cover property-related expenses, ensuring these are paid on time.
🔍 Did You Know?
Lenders commonly use escrow accounts to collect and pay property taxes and homeowners insurance on behalf of the borrower, bundling these payments into the monthly mortgage.
Examples:
Example 1:
A buyer puts down $5,000 in earnest money, which is held in an escrow account until the home purchase is finalized. Once the deal closes, the escrow agent releases the funds to the seller as part of the payment for the home.
Example 2:
After purchasing a home, the lender requires the borrower to deposit funds into an escrow account each month, along with their mortgage payment. These funds are then used to pay property taxes and homeowners insurance when they come due.
Why It’s Important:
Escrow accounts help ensure that important property-related expenses, like taxes and insurance, are paid on time. This reduces the risk for both the homeowner and the lender, as missing these payments can result in penalties or liens on the property. During the home-buying process, escrow provides a neutral space for holding earnest money and other funds until the transaction is complete.
Who Should Care:
- Homebuyers who need to understand the role of escrow in holding funds during a transaction.
- Homeowners whose lenders require them to maintain an escrow account for property taxes and insurance.
- Real estate agents and lenders who rely on escrow accounts to manage funds during the buying process.
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