What You Need to Know About Escrow and Your Mortgage

Estimated reading time: 3.5 minutes

Buying a home is a large financial commitment, so it’s important your money is protected. An escrow account can help ease the anxiety you may feel about putting down a large sum of money for a home or other kinds of homeownership expenses. Let’s learn more about escrow, how it can benefit you, and what’s included in this type of account.

What is Escrow?

Escrow is a third-party account used to hold money, paperwork, or property until an agreed upon condition is met. When it comes to home financing, there are two types of escrow you should know about: purchase and mortgage.

Purchase Escrow

Purchase escrow is related to the buying or selling of a home. This version of escrow helps manage all the moving parts and finances of the home sale. Escrow assures buyers that the money they’ve put into the purchase is going to the right accounts. For sellers, escrow is an assurance that they’re releasing ownership of the home and hopefully making a profit.

Mortgage Escrow

Mortgage escrow is used to hold payments for ongoing housing expenses, such as taxes and insurance. The account may cover taxes and insurance premiums when they are due, allowing a homeowner to pay without using out of pocket funds.

What is Kept in Escrow?

Earnest money, also known as a good faith deposit, is held in escrow until the transaction is completed. Earnest money is typically between 1% and 3% of the home’s listing price and is used to show sellers how committed you are to the purchase of the property. After closing, earnest money is applied to a buyer’s down payment amount.

Once you’re an official homeowner, a portion of your monthly payment is held in escrow until tax and insurance payments are due. This ensures you don’t have to pay out of pocket.

Is Escrow a Mortgage Requirement?

Depending on your loan type, escrow may or may not be a requirement. Conventional mortgages that have down payments smaller than 20%, FHA programs, and USDA programs all require escrow accounts. VA programs and conventional mortgages with larger down payment amounts do not require escrow.

What are the Benefits of an Escrow Account?

Whether you’re an established homeowner, you’re looking to buy, or you’re looking to sell, escrow accounts ensure a person’s finances are fully protected.

Escrow Benefits for Homebuyers

For a homebuyer, escrow can feel like a vault. Your escrow holds onto a portion of your finances, protecting your deposit until the sale is concluded. If the seller doesn’t meet the home’s contract terms, the earnest money deposited into escrow is returned to you.

Escrow Benefits for Home Sellers

If a buyer backs out of a purchase agreement for a reason that isn’t protected by the contract, the earnest money is given to the home seller to help recoup their losses.

Escrow Benefits for Established Homeowners

Established homeowners can also benefit from escrow. Instead of having to use a personal account and budgeting for insurance and tax payments, mortgage escrow allows a homeowner to include these costs into their total monthly payment. Your mortgage lender then pays your premiums on your behalf as they are due.

This type of escrow can be especially helpful for first time homebuyers who may be new to budgeting larger homeownership costs in addition to their monthly payments.

Find Home Financing That Works for You

When it comes to home financing that empowers you throughout the process, it’s important to work with a Loan Originator you can trust. Contact us today to be paired with an expert Loan Originator who can walk you through loan programs, the housing market, and set you up for mortgage success!