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Escrow is defined as the "The holding of funds, documents, securities, or other property by an impartial third party for the other two participants in a business transaction." When the closing is completed, the escrow agent will release the entrusted property. This process begins with the lender asking the buyer to open an escrow account for insurance and taxes when a mortgage agreement is agreed upon. Since the negotiation process is very stringent, a neutral third party holds the escrow and he or she is called an escrow agent. The role of the escrow agent is to carry out the instructions that are laid out by both the seller and buyer. The escrow account should have enough funds to cover property taxes and homeowner's insurance. You as the buyer will make a first deposit, followed by additional payments every month. However, these escrow fees are usually added onto your mortgage payment for convenience. The escrow is released eventually, but only so that your taxes and insurance premiums can be paid.

What Is The Purpose Of Escrow?

The escrow arrangement is implemented to protect the lender by guaranteeing that the borrower pays the taxes and homeowner's insurance on time. What could happen in the worst case scenario if the escrow agent didn't accomplish his or her job? If the borrower does not pay the property tax there is a chance that the municipality could put a lien on the house. This would make the home difficult to sell due to the legal entanglement. Another nightmarish possibility is that the house could be damaged, or even completely burned down. If there has been no homeowner's insurance paid then the lender has no collateral and gets the short end of the stick.

Are there are any benefits for the borrower? Yes, this provision helps all parties involved, not only the escrow agent who gets work, not only the lender who gets protection, but also the buyer who gets to spread the insurance and tax expenses evenly over a 12 month period. Remember that property taxes can be as high as $2,000.00 a year, with additional money for insurance. However, this large sum broken down into monthly payments can amount to less than a common utility bill in this instance.

Understanding Escrow Payments

Escrow payments have a built-in cushion, meaning that if the buyer misses a payment, the lender will still pay your accounts on time. Federal law actually prohibits lenders from requiring over two months of escrow expenses. The lender also has the responsibility of reviewing

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