What is Escrow?
What is escrow? As it turns out, this term can actually mean many different things. Investopedia defines it as a legal concept in which “a financial instrument or an asset is held by a third party on behalf of two other parties that are in the process of completing a transaction.” From the stock market and real estate to intellectual property and law, escrow can be used in many contexts. But how does it apply to your mortgage?
An escrow account – if it’s attached to your mortgage for taxes and insurance – is uniform across the country. However, the way escrow applies to the mortgage world can vary from coast to coast.
For instance, in California or Nevada, all mortgage transactions are closed in escrow. That means the buyer and seller meet, sign all of the papers and wait until everything is finalized to receive any payments or keys to the house. So, when you’re watching HGTV and hear Tarek on Flip or Flop talk about their latest project going to escrow, they’re essentially referring to the entire closing process.
Escrow Use Cases Explained
In Michigan, when you write an offer on a house, you’re going to put money in an escrow account that the real estate broker has, and that is typically called an earnest money deposit. If you, as a buyer, want to write an offer on a house, you need to give the seller some collateral in exchange for taking their house off the market. That’s what the earnest money deposit is for. The amount that you write for an earnest money deposit check could vary based on home size and price, but an escrow account is typically a non-interest-bearing account that must follow state and government rules.
For first-time homebuyers with less than 20% down, escrow refers to a non-interest-bearing, government-regulated amount of money set aside during the mortgage process that will cover the first year of property taxes and homeowner’s insurance. This does not necessarily apply to every borrower, depending on the loan program. If you’re an experienced homebuyer and you have at least 20% equity in your home, you are not required to have escrow in Michigan.
Part of homeownership is paying your tax bills twice a year. Opening an escrow account allows you to set the money for your property taxes and homeowner’s insurance aside so you don’t have to worry about budgeting and saving throughout the year.
Another important factor to remember is that escrow accounts get balanced annually because taxes and insurance will adjust over the life of your loan. This means if your property taxes or homeowner’s insurance go up or down, it’s going to impact your monthly payment. The annual escrow analysis adjusts your payment to make sure there’s enough money in the account for your taxes. It’s kind of like the action of balancing a checkbook. You have to look at what’s coming in and what’s going out and make sure there’s enough money.
Escrow has no impact on the seller and starts at the beginning of your mortgage process. When we do an estimate for someone during application, we estimate all of the costs for the first year of property taxes and homeowner’s insurance and add them into their total closing costs.
Ready to take the next step in your journey to homeownership? Send us a message! We’d be happy to connect you with a lending expert on our team who can discuss your options with you.