If you're buying a home, you should familiarize yourself with escrow accounts and how they work. It's an important part of real estate transactions that's designed to protect both the buyer and seller. To learn more about what is escrow in real estate, continue reading.

 

What is Escrow in Real Estate?

 

Escrows: The Basics

Whether in real estate, business financing or elsewhere, an "escrow" is essentially an account maintained by a third-party in which a person or business deposits money for use at a later date. The escrow agent holds the money, ensuring it's safe and ready to be used later. When speaking about real estate, there are two specific types of escrows used for such transactions. 

Mortgage Escrow

A second type of escrow used in real estate is a mortgage escrow. When lending money to a home buyer, mortgage companies typically require the buyer to make payments into an escrow account as part of their regular monthly mortgage. It's not a second, separate monthly payment; instead, it's added to the buyer's standard monthly mortgage payment.  

What is Mortgage Escrow Used For?

An escrows is generally used to secure property tax and homeowner's insurance. Normally, these bills are charged annually to homeowners. With a mortgage escrow, however, you don't have to worry about getting hit with two massive bills at the end or beginning of the year. As long as you make your monthly mortgage payments -- and your lender is using a mortgage escrow -- your taxes and insurance will also be paid for.

The Real Estate Settlement Procedures Act (RESPA) regulates the amount of money mortgage lenders can require borrowers to put into escrow. It does not, however, require lenders to use mortgage escrows when issuing loans. If a buyer is able to pay his or her own property taxes and homeowner's insurance premiums, the lender may allow the buyer to skip the mortgage escrow. Normally, lenders require a loan-to-value (LTV) ratio under 80% in order for this to happen.

When buying a home, contact your mortgage lender to learn more about escrow accounts and their respective requirements. Because different lenders have different requirements, only your mortgage lender can provide you with specific guidance.

This article was brought to you by Premier Island Properties - A full service real estate firm serving Hilton Head Island and Bluffton, South Carolina. For more real estate news, information, and interesting facts about the Lowcountry, please visit our website.