When buying a house, you may have heard the term “escrow” and have wondered what it means. When you place an offer on the house, and that offer is accepted, you’ll probably have to pay earnest money as a sign of good faith to move toward buying the home. That earnest money is deposited into an escrow account where it will remain until the deal closes. Once everything is finalized, the funds from that account are released and are generally applied to their mortgage and closing costs.
Once escrow closes, the financing company will open a new escrow account where it will hold funds to pay for property taxes and homeowner’s insurance as part of the monthly mortgage payment. Generally, you’ll pay 1/12th of your annual insurance and property taxes as part of your monthly payment. Upon opening of the escrow account, the lender may require you to pay the first few months of insurance to establish the account, and this is usually part of closing. The lender will access the account to pay for taxes and insurance as need requires.
According to federal regulations, a lender can only keep enough money in the escrow account to cover the annual homeowners’ insurance, property tax bills, two extra monthly payments, and an additional $50. Should your tax liability or insurance change, you may wind up having to pay more (or sometimes less) into your escrow account. If your lender discovers that you have more money in your escrow account than what you will need, they’ll send you a refund, which is undoubtedly a pleasant surprise.
If you happen to be buying a house for cash without financing, the only time you’d have to worry about escrow is with the earnest money. Once the home sale finalizes, you would then be responsible for paying your homeowner’s insurance and property taxes. And of course, if you pay your home off, then your escrow account would close, and the tax and insurance burdens would be your responsibility.