So What Do You Know About Escrow?
What is Escrow and Why It’s Important?
Escrow is one of those frequently used terms that is important for home buyers and sellers to understand. And it’s something that we are frequently asked about. So let’s demystify it once and for all. According to Wikipedia, escrow refers to money held by a neutral third-party on behalf of parties who are involved in a transaction.Typically, when money is held in escrow, it can only be released or transferred when certain conditions are met.
Historically, the word derives from an old French term, escroue, meaning a scrap of paper or a scroll of parchment that a third party held until a transaction was completed. It also has roots in the Middle English word, “escrowl” meaning “scroll”. Although the concept of escrow was a regular commerce practice throughout history, lending escrows became firmly established in the United States during the Great Depression (1930s) when many homeowners didn’t have the cash to pay sizeable tax bills. Solenders agreed to collect 1/12th of the taxes, plus the mortgage payment on a monthly basis, making it an easier amount for homeowners to manage. By 1934, the Federal Government mandated that all Federal Housing Administration (FHA) insured mortgages have escrows.
In real estate lingo, here’s a brief overview of ways you might see the word escrow applied.
Escrow payment refers to the portion of the monthly mortgage payment that is designated to pay for property taxes and home insurance, an amount that is “over and above” the principal and interest. Because it’s designed to cover taxes and insurance, the escrow payment is also referred to as “T&I”, while the mortgage payment consisting of principal and interest is called “P&I”.
Lender escrow accounts are those that are established by a lending institution to receive monthly (escrow) payments for home insurance and property taxes, which are paid annually. When taxes and insurance are due, the bills are sent to the lender to pay.Money is typically collected at closing to “seed” the lender’s escrow account to ensure that enough funds will be available when taxes and insurance fall due.
Earnest money deposits are sometimes referred to as “good faith” money. When a buyer submits an offer, he also deposits earnest money into an escrow account held by a neutral third party such as a title company or law firm. These funds then will be applied to the total amount a buyer brings to closing. Should a transaction not close, the buyer or seller (or both) may make a claim on the escrowed amount.
