What Is Escrow?

In this article:

  • What is an escrow account?
  • How does escrow work?
  • What does in escrow mean?
  • What does it mean to close escrow?
  • What is an escrow payment?
  • Is an escrow account required?

When buying a home, you’ll probably hear your lender or real estate agent use the word escrow. The term escrow can describe a few different functions, from the time your offer is accepted to the day you close on your home – and even after you become a homeowner with a mortgage.

There are essentially two types of escrow accounts. One is used throughout the homebuying process until you close on the home. The other, commonly referred to as an impound account, is used by your mortgage servicer to manage property tax and insurance premium payments on your behalf.

Disclaimer: The information contained in this article is for informational purposes only and is not intended to be relied upon as financial or legal advice, guarantees or warranties of any kind. Reference to escrow accounts here refers to an escrow account established to facilitate the purchase transaction of a new home.

What is an escrow account?

An escrow account is a contractual arrangement in which a neutral third party, known as an escrow agent, receives and disburses funds for transacting parties (i.e., you and the seller). Typically, a selling agent opens an escrow account through a title company once you and the seller agree on a home price and sign a purchase agreement. When you’re buying a home, this escrow account serves two main purposes:

  1. To hold earnest money while you’re in escrow
  2. To handle and disburse the funds until all escrow conditions are met and escrow is closed

How does escrow work?

When you make an offer on a home, the seller may require you to pay earnest money that will be held in an escrow account until you and the seller negotiate a contract and close the deal. This earnest money gives the seller added assurance that you do not intend to back out of the deal, and it protects them in the event that you do. It also motivates the seller to pick your offer over others.

During the escrow process, the escrow agent will handle the transfer of the property, the exchange of money, and any related documents to ensure all parties receive what they are owed. This removes uncertainty over whether either party will be able to fulfill its obligations, and it helps ensure that neither party is favored over the other.

What does in escrow mean?

When you hear the phrase “in escrow“, it means that all items placed in the escrow account (e.g., earnest money, property deed, loan funds) are held with an escrow agent until all conditions of the escrow arrangement have been met. The conditions usually involve receiving an appraisal, title search and approved financing.

While the earnest money is in escrow, neither you nor the seller can touch it. Once conditions are met, the earnest money will likely be applied toward the purchase price or your down payment on the home.

What does it mean to close escrow?

To close escrow means that all of the escrow conditions have been met. You’ve received a home loan, and the title has legally passed from the seller to you. During the closing of escrow process, a closing or escrow agent (who may be an attorney, depending on the state in which the property is located) will disburse transaction funds to the appropriate parties, ensure all documents are signed and prepare a new deed naming you the homeowner.

Afterward, the escrow officer will send the deed to the county recorder for recording before escrow is officially closed. Once closed, you and the seller will receive a final closing statement and other documents in the mail. Check the statement carefully and call the closing agent immediately if you spot an error. Save the statement with your most important papers, as you will need it when you file your next income tax return.

What is an escrow payment?

After you purchase a home, you’ll be responsible for maintaining insurance on the property and paying state and local property taxes. The property tax and insurance premiums you owe are the escrow payments made to your escrow or impound account.

The impound account ensures that the funds for taxes and insurance are available and that premiums are paid on time. Your lender doesn’t want you to miss a tax payment and risk a foreclosure on the home. They also don’t want you to miss a homeowners insurance payment, or they may be forced to take out additional insurance on your behalf to cover the home in the event of property loss or severe damage.

How monthly escrow payments work

The amount of escrow due each month into the impound account is based on your estimated annual property tax and insurance obligations, which may vary throughout the life of your loan. Because of this, your mortgage servicer may collect a monthly escrow payment, along with your principal and interest, and use those collected funds to pay taxes and insurance on your behalf. 

Your lender will notify you 30 days before your next payment if the amount changes. You can also ask your mortgage servicer to walk you through the local impound account funding schedule that applies to your loan. If there are insufficient funds in your impound account to cover the taxes and insurance, your monthly mortgage payment may increase (even though your principal and interest will stay the same on fixed-rate loans).

Initial escrow payment at closing

Lenders usually require at least two months’ worth of insurance and property tax funds in the impound account at closing. The amount you have to prepay into an impound account for these costs is based on your location. Keep in mind that these funds aren’t additional closing costs. Instead, you’re prepaying extra months of home insurance and property tax bills that you would be required to pay when due. Your mortgage servicer will list the initial escrow payment amount due at closing on your loan estimate.

Your escrow analysis statement

Each month, your mortgage statement will show you how much you’ve accrued in your impound account. And each year, your mortgage servicer is required by law to send you an annual escrow account analysis showing you some of the following:

  • The amount of funds received from you
  • The amount of funds paid out for insurance and property tax
  • An estimation of how much the escrow portion of your monthly payment may increase or decrease based on the premiums owed
  • Notice if you don’t have enough funds in your account to pay the estimated tax and insurance due in the next bill (i.e., escrow shortage)
  • Notice if you have a negative balance in your account that is owed to bring your account to current (i.e., escrow deficiency)

Is an escrow account required?

An escrow account for paying property tax and homeowners insurance is generally required by lenders who originate VA, FHA and conventional loans. In some instances, lenders may allow the homeowner to pay the property tax and home insurance as a lump sum instead of setting up an escrow account. If you waive escrow, be aware that some lenders may charge you a fee or an increased interest rate.

While you may not be required to set up an escrow account, you can choose to open one voluntarily to break up insurance and property tax payments into smaller amounts, keep track of payment due dates and avoid surprise bills at the end of the tax year.

Need a home loan? Contact a pre-approval lender today to get pre-approved for a mortgage.

The post What Is Escrow? appeared first on Home Buyers Guide.

Source: zillow.com

A 3% mortgage rate may be the new norm

For the third consecutive week, mortgage rates pushed past 3% – with the average mortgage rate for a 30-year fixed loan up four basis points last week to 3.09%, according to Freddie Mac’s Primary Mortgage Market Survey.

Rising mortgage rates typically signify a recovering economy, and despite applications for mortgages dropping week-over-week, Freddie Mac’s chief economist Sam Khater expects a 3% rate to sustain market interest for many potential buyers.

A number of economists say rising rates may just be what the industry needs to cool the insane housing demand the market has been struggling to maintain for months. Increased inventory was the initial hope. However, due to consistent materials supply shortages and lumber prices that are up about 200% since April 2020, builders’ confidence index dropped in March. Single-family housing starts declined last month.

“The elevated price of lumber is adding approximately $24,000 to the price of a new home,” said NAHB Chairman Chuck Fowke. â€œThough builders continue to see strong buyer traffic, recent increases for material costs and delivery times, particularly for softwood lumber, have depressed builder sentiment this month. Policymakers must address building material supply chain issues to help the economy sustain solid growth in 2021.”

Now, economists are keeping a watchful eye on the speed in which interest rates have risen, said Doug Duncan, Fannie Mae’s senior vice president and chief economist.

“Underlying Treasury rates have risen, though lenders have absorbed some of the rise by shrinking spreads, as confirmed by our recent Mortgage Lender Sentiment Survey results,” said Duncan. “While the rate rise will curtail refinances to some degree, 2021 is poised to be a good year overall for housing activity and housing finance, as the economy continues to recover and COVID-19 restrictions ease.”

Duncan said Fannie Mae is watching for risks around monetary and fiscal policy on interest rates moving forward, though none are an immediate threat as the Federal Reserve has not changed its FOMC statement for several months.

Nevertheless, mortgage rates remain near historic lows (they are still 0.8 percentage points below the 2019 average), but if the price of housing can’t cool in time, many first-time homebuyers may miss the chance to take out a record low rate. Despite this risk, Fannie Mae’s baseline view is that the recent rapid rise will not continue but that rates will drift only modestly higher over the remainder of this year.

“Essentially, we believe the Fed will keep policy accommodative for longer, not tightening until inflation clearly exceeds its 2.0-percent target for a substantial period,” Fannie Mae said. “This view is consistent with current market measures, such as Fed Funds futures, not anticipating any rate hikes until 2023 and, even then, at a slow pace.”

The post A 3% mortgage rate may be the new norm appeared first on HousingWire.

Source: housingwire.com