If you’re buying or selling a home in Midland, you’ll hear the term escrow. But what is it, and how does it protect you during a real estate transaction?
What is Escrow in a Real Estate Transaction?
In real estate, escrow means secure holding. It’s where important items, like a buyer’s earnest money check, purchase contracts and other documents, are kept safe. Typically, these things are held in escrow until the deal closes.
How Does Escrow Work?
An escrow agent – a third party involved in the deal – makes sure everything goes smoothly. That includes the transfer of money and the safekeeping of documents involved in the transaction. The escrow agent keeps funds separate and doesn’t turn them over to either party until all your agreement’s conditions are satisfied.
Does Escrow Cost Money?
The cost of escrow varies, but typically, it’s between 1 and 2 percent of the cost of the home.
Does Escrow Protect Buyers and Sellers?
Escrow is there for the sole purpose of protecting both buyers and sellers. For example, if you’re the buyer and you asked the seller to repair something in the house – say, the water heater – and you discover that it hasn’t been repaired before or during your final walk-through, the escrow company won’t give the seller your money until it’s done.
If you’re the seller and your buyer backs out of the transaction for no reason (or he or she hasn’t met one of the contingencies in your purchase agreement), the buyer won’t get back the earnest money deposit. You’ll get that if your contract says it’s forfeited to you.
What About Escrow When it Comes to Mortgage Payments?
Once you buy a home, you’ll have another type of escrow account to deal with – provided you worked with a mortgage lender that holds your money for taxes and insurance and pays these fees for you. Part of your monthly payment is reserved for your escrow account.
When those bills are due (your property taxes and your homeowner’s insurance), your lender will take the money out of escrow and pay them for you in most cases.
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