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What Escrow Means

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By : Sonia Smith    99 or more times read
Escrow is a way of transferring or exchanging money or property using a neutral third party. This process is normally associated with real estate transactions.

In most areas, escrow agents comprise a certain profession with its own training and accreditation requirements. In some areas, lawyers can do an escrow. In either way, the process is covered by a certain regulation and protection using licensing and bonding.

In the event that a home or property changes hands, the seller transfers the property title to the escrow agent. In the same process, the buyers will transfer funds or does a bank transfer mortgage proceeds to the escrow agent.

After all the conditions of the purchase agreement have been met, the escrow agent then assigns the property to the homebuyer and distributes the money to the home seller.

Escrow is used in the event that a mortgage closes. The mortgage lender normally requires you to open an escrow account to cover the property taxes and homeowner’s insurance. You have to make an initial deposit, followed by putting monthly payments to the account.

The escrow agent will release the funds when your taxes and insurances premiums become due. This is a means to protect the lender by ensuring that you pay your taxes and insurance on time. For example, if you default on your property tax, your municipality could put a lien on your property, making it difficult for you to sell it. On the other hand, if your house burns down and you failed to pay the insurance, the mortgage lender will be left without collateral.

In addition, escrow can benefit a borrower through helping him or her spread insurance and tax expenses over twelve even payments. For instance, assuming your yearly property taxes are two $1,000 payments each and your annual insurance is $400. I f pay this directly, this would mean three huge annual payments. However, your cost of escrow will be an affordable $200 a month.

Escrow services have gone digital because of the internet age. Most online businesses allow remoter buyers and sellers to purchase services and goods from each other. Online escrow services are structured to give a reliable third party a way to complete a sale.

When you are planning to use the escrow services, it is necessary for you to weigh your options well and proceed with caution because there are plenty of fraud operating around who have increased their established and sophistication level of doing illegitimate escrow services.

In most states, the money put in an escrow account does not earn interest for you, thus most borrowers choose to pay their insurance and taxes directly. The mortgage lender may be agreeable to this as long as you make a down payment of more than twenty percent of the home price.

Nevertheless, some lenders will try to raise the rate of interest slightly to compensate. When you agree on putting funds in an escrow account, it would be hard to cancel it; therefore, you should make it a point to understand the arrangement well before your mortgage closes.
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