“Escrow” is a word that causes confusion for many individuals. The definition of the word is often obfuscated by the fact that it has multiple meanings, implications and purposes, particularly in a real estate transaction. Although individuals often struggle to understand escrow, or escrow service, gaining a fuller sense of its meaning is important to those who plan to buy or sell a property in the near future.
According to the Merriam-Webster dictionary, the word escrow means “a deed, a bond, money, or a piece of property held in trust by a third party to be turned over to the grantee only upon fulfillment of a condition” or a “a fund or deposit designed to serve as an escrow.” Sometimes, folks will use it interchangeably with escrow service. Even if the meaning is not entirely lucid to you, you can see that it involves a third-party entity during a real estate transaction. Real estate primarily involves two parties, but these two parties need to meet certain conditions.
The term “escrow” is heavily used with loans, particularly in the home-buying process. In the process, you have both a buyer and a seller. Other individuals, such as a real-estate attorney and a real estate agent, are generally involved. In order for successful completion of the transaction, both parties must be satisfied by the agreements and the terms. Yet people do not want to continue hashing out elements of the deal without some sort of promises. Money, therefore, is held in escrow until the terms of the contract are met. Then, all parties have a guarantee of a smooth and successful transaction.
When you make an offer on a home, the money may be placed in escrow. That means your funds have been placed in the hands of an escrow experts. You wrote a check that this individual has for safekeeping. You wrote this check because you are still in negotiations with the seller. However, the check shows that you are planning to make the offer in good faith if the conditions of the deal are agreed upon by both parties.
Once you have purchased the house, you are going to enter into a mortgage agreement. Each month, you will need to pay a certain amount of money to the bank. In addition to your mortgage, you will also have to pay taxes and homeowners insurance. Sometimes, the money for these bills is also put into an escrow account. Some wonder why they simply cannot pay their taxes and insurance out of their pockets instead of establishing this escrow account.
When you purchase a home, you may be required to set up an escrow account. If you have a Federal Housing Administration loan, then you are. However, if you put at least 20 percent of your house’s price down, then you are not required. Still though, an escrow account can be a good idea. When you have this account, you do not have to worry about paying for taxes and the insurance in a lump sum. Breaking down the payments into smaller fees is much more manageable for most individuals. It also helps to keep you on a budget. Instead of paying taxes and insurance directly, with escrow, you pay the bank on a monthly basis.
Perhaps you did put 20 percent down on your house, or maybe you are planning to do so. Maintaining an escrow account is still an option for you. Whether or not to do so really depends upon how proficient you are at saving money. If you can save the money to pay your taxes and insurance in full and you do not have any qualms about it, then you do not necessarily need the escrow account. On the other hand, if you are afraid that you will funnel the funds into entertainment purposes and luxury items, allowing the escrow account to do its job is a smart idea.
Remember, written within the definition of the word “escrow” is the fact that the holder is a third party entity. Therefore, this third party is an objective individual in your situation. When you want to, or need to, place money into escrow, you must work with an entity that is a professional in the field.
Trying to find an entity that can safely secure your money in escrow can be challenging. However, you can ask your real estate attorney for recommendations. Still though, you must remember that the escrow holder is an objective party. While your attorney is working for you, the escrow holder is not. Therefore, any recommendations they offer are unbiased ones. Paid referrals cannot happen in this particular field because the impartiality of the arrangement is immediately dismissed.
Whether or not you take suggestions from anyone else, the onus of choosing a proper escrow holder rests entirely with you and the other party involved. You want to work with an escrow service provider who specializes only in escrow. That is the best way to work with a professional who is impartial, but who also has a great deal of experience in the field. Furthermore, you want to make sure that the person or entity is licensed by the Department of Corporations, which is also commonly referred to as the DOC.
Just as with any such transaction, you are going to receive a contract. Simpy signing your name on the dotted line and claiming to have read everything doesn’t work here. Remember, you also want to ensure that you are receiving a suitable proposition from the escrow company. The escrow holder is not your personal adviser and should not be treated as thus. Therefore, you should speak with your attorney to find out if the terms of the agreement are reasonable and to identify the meaning of any terms that are currently obfuscated.
When you open an escrow service account, you will likely be charged fees. These fees vary depending upon the individual escrow entity, so you may need to shop around to procure the best deal. They may charge you based on the time that it takes to close, or the escrow provider may have a flat rate for a certain period of time. A fee will likely be charged if you decide to cancel the escrow account. Usually, people do not cancel these types of accounts, but situations do arise where they must.
Before you even sign up for the escrow account, you should ask what the conditions are regarding cancellations. Even if you have no intentions of cancelling, you cannot predict with 100 percent certainty what is going to happen in the future. Generally, the escrow holder will require that both parties submit documentation stating that they are both cancelling. Again, the escrow holder is an objective third-party, so this entity cannot make a call on who is wrong or right. Remembering that the ability to cancel relies on the other party’s agreement is important when starting this account too.
In order for the escrow service account to close, the holder must have the agreed-upon sum of money. When you sign the agreement, find out what forms of payment the escrow holder accepts. You are often better off paying with a form other than a personal check if possible. If you use a personal check, then you will need to wait for it to clear. Don’t expect that to happen overnight. It could be weeks or longer before the check clears and you are able to move along on your way. At the closing, make sure you reveal all of the documentation properly. Also, you should ask if you are receiving any sort of refund; that does happen at times.
Once the escrow has closed, you may think you can just toss the paperwork and that you can call the escrow company if you need another copy. That is not always the case. The escrow company may very well destroy the documentation once your transaction is finished. You could need the escrow paperwork in the future, so be sure to keep it in a safe place. For example, when it comes time to file taxes, you will need to present that information to your tax preparation specialist.
When you are faced with the possibility of an escrow account, allow your real estate attorney to help walk you through the process is a smart and effective plan.
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