At some point in time you have probably heard the word 'escrow' normally when you are buying or selling a house, you probably were 'in escrow'. Even though you have probably heard this word before, you may not be sure what exactly it means. Escrow can refer to a couple different things or events, so it can get confusing.
So, what exactly is escrow? An escrow account is normally controlled by a neutral third-party member who holds on to money until the terms made between the borrower and lender have been met. Escrow isn't just for when you are buying a home, but can include building projects and even online auctions. Most of the time when you are buying a house and have a mortgage or home loan, your lender will require you to open an escrow account. However, if both parties agree, you may not need to enter into one.
There are a couple reasons why you might want to open an escrow account whether your lender asked for you to or not. It allows home owners to pay their taxes and insurance on a month to month basis, without this account, the home owner would have to make these payments all at once. By storing the money for taxes and insurance in this account, the home owner doesn't have to worry about keeping track of payments or falling behind. It can also help out if you have to make any insurance claims. When and if you need repairs done, your insurance company may put money into your account and then release it to the contractor once the repair has been made.
Of course, as with everything, there are rules when it comes to your escrow and are normally stated in your mortgage agreement. As to what you can use the money for, well, that's also explained in your mortgage. Majority of the time, the money that you put in can be used for property tax payments and insurance payments. That is all it can be used for too. You cannot pull the money out in order to pay your monthly mortgage rate, or to make up for a bad or bounced check, or to pay for any bills. If your mortgage agreement doesn't state that you need to have an escrow account, you don't have to get one. However, if it is stated, then you are required to open an escrow account and comply with the terms that have been set up by you and your lenders.
The amount of money that needs to be put into your account will vary depending on your location and the company that is in charge of the account. Some account will also have fees and charges which, once again, will depend on where you are and who your escrow agent is. No matter what happens, you have to remember that the neutral third party has no control over any fees that may be applied on the account. If you are buying a house, you will want to check and see what your mortgage agreement states about entering into escrow or not.