One of the most significant and most essential purchases any individual will make in life is buying a home. It often requires a considerable sum of money in the form of mortgage payments, and because of this, the buyer or seller involved needs a safe, tested and secure way via which they can carry out such delicate transactions. To make sure there is a stress-free transaction in the home sale and Mortgage transfer, there is the need for a lender to open an account for the client looking to buy the house. This account is called Escrow.
What Is An Escrow Account?
An escrow is simply a place or an individual that holds all assets involved in the sale of a house (or any other property). It is carried out by a third party, like a mortgage company, which secures and holds the assets until all the payment terms and the entire terms of the home sale agreement have been carried out. It will be unwise for buyers to transfer over all the cash to a seller without getting the deed of the house in hand and it would also be unwise for the seller to hand over the deed to the buyer without being paid all the money the house is worth. An escrow provides a haven to keep all assets involved in the transactions until all requirements from both sides of the transactions have been fulfilled.
Adequate Protection For Sellers And Buyers
The escrow account is unbiased as it offers equal protection to both sellers and buyers. The escrow account provides protection to the seller by holding the deed till the completion of the deal. This means the buyer will not be able to take custody of the property till the total Mortgage funds have been paid to the seller.
Likewise, the buyer is offered protection as the Mortgage funds paid are not given to the seller until the seller meets all the conditions and terms of the agreement with the buyer. So, if there are repairs to be done or liens to be satisfied by the seller, they must be carried out before the Mortgage funds are transferred. An escrow works in the best interest of both the seller and the buyer.
Escrow For Insurance And Property Tax
Upon the completion of the transaction and the signing of the final paperwork, the joint escrow account is closed, and both parties get their expected returns from the deal. At this point, lenders will open a new escrow account for buyers.
Typically, when you purchase a home through a lender, you are required to purchase homeowner’s insurance. In addition, your local tax collector charges an annual property tax. Buyers can choose to have these annual payments divided into monthly payments and wrapped into their mortgage payment. The mortgage lender then separates the payment; allocating a portion to your home loan, your homeowner’s insurance, and your property tax.
The payments for your homeowner’s insurance and your property tax are deposited into this second escrow account. When the time comes to pay your annual homeowner’s insurance and property tax, your mortgage lender will use the funds in the escrow account to settle the bill.