How Does Escrow Work?

Image courtesy of viva escrow

You Ask, We Answer: How Does Escrow Work?

Whether you’re a homebuyer or you’re selling your home, the word “escrow” is sure to come up at some point in your Connecticut real estate transaction. While your Calcagni Real Estate agent can work with your mortgage lender to help explain the details as they pertain to your unique contact, we’re exploring escrow accounts and why they matter—and what you can expect from this third party account.

What is an escrow account?

An escrow account is a legally binding arrangement that allows a third party to temporarily hold large sums of money until certain conditions—for instance, the closing of a purchase agreement—are met. Think of escrow as a “middleman” of sorts.

In a real estate transaction, there are typically two types of escrow accounts. The first protects the buyer’s deposit to ensure their money reaches the correct recipient according to the terms of their purchase contract. The deposit indicates to the seller that you’re serious about buying their home; depending on the terms of your contract, the seller may get to keep the money in escrow if, by your own fault, the purchase agreement falls apart. If you close on the house, however, it is common that the money in escrow would be applied to your down payment.

The second type of escrow account is used after you purchase the home to hold money aside for insurance and tax bills. Your mortgage lender may set up this type of escrow account after closing and hold a portion of your mortgage payment in the account; when your taxes or insurance payments come due, your lender will pay the bills out of this account.

Since some bills may change from year to year, you may be required to keep up to 2 months’ worth of payment in your escrow account as a cushion to cover unexpected expenses or increases.

Why do I need an escrow account?

Having an escrow account as a Connecticut homebuyer offers the benefit of protecting your deposit should something fall through on the way to closing. If your purchase agreement states that the deposit should be returned to you, you don’t have to worry about navigating the murky waters of asking the seller to mail you the check; your money is protected in escrow.

For existing Connecticut homeowners, the escrow account takes the pressure off having to budget on your own for taxes and insurance, and helps you avoid the last minute panic that gathering a large lump sum of money to pay your bills may cause. You won’t have to worry about missing payments, because your lender will make sure your bills are paid on time. If your lender misses payments, they are liable for the penalties accrued from late payments.

Lenders have a vested interest in escrow accounts because they know if you fall behind on your tax or insurance bills, you could have a lien placed on your home or it will be uninsured—both of which will end up costing your lender money.

Can I do without an escrow account?

Depending on your mortgage lender, you may be required to have an escrow account. However, some banks and lenders may allow you to avoid escrow and take on the responsibility for budgeting and paying tax and insurance bills on your own.

If you are taking out a Federal Housing Authority (FHA) loan or a Veterans Affairs (VA) loan, note that you are required to have an escrow account to cover your tax and insurance expenses.

In short, having an escrow account may be required by your mortgage lender, but even if it’s not, you may find it to be beneficial as both a homebuyer and a homeowner. If you have questions about fees, clauses or just how an escrow account would best work for your real estate transaction, don’t be afraid to ask your Calcagni agent and your mortgage lender. They’ll be able to provide you with details that pertain to your home buying or selling situation, and help you find the solution that works best for you.


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