Your New Home Loan: What Exactly is Escrow?

By Emily Kerr
LoanPage Columnist

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When you're a new home buyer looking for your first new home loan, you're in the process of learning a whole new language. For example, just what exactly is escrow?

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Escrow is a way of transferring property from the seller and money from the buyer through use of a third party which is neutral. Escrow accounts hold mortgage and insurance payments, generally two months worth. Escrow agents in many states have accreditation requirements and in some areas escrow is handled by attorneys.

The idea behind escrow is to make sure neither party, buyer nor seller, holds all the cards at the same time. The seller transfers the property title to the escrow agent and the buyer transfers funds. Since mortgage funds come from new home loan lenders, escrow protects the lender as well as the buyer and seller in the transaction.

The Escrow Protection

The funds that go into an escrow account are a deposit of real estate taxes and insurance premiums. The mortgage lender is protected by the escrow account which ensures taxes and insurance will be paid and on time, if the buyer defaults or is unable to pay. The buyer is protected because the seller can't take both the property title and the funds because the title is in escrow. The seller is similarly protected.

Buyers can only be required to pay two months worth of mortgage payments into an escrow account, a limit set by the federal Real Estate Settlement Act, and sometimes can skip escrow altogether if the lender is willing and the loan-to-value ratio is below 80 percent, though often the lender will then raise the interest rates on the mortgage to compensate for the additional risk they're taking by financing this particular new home loan.

Sources:

Mortgage Basics - Escrow What do I have to Do While in Escrow?

About the Author

Emily Kerr is a freelance writer with over 425 articles in print. She write about everything from home loans to home construction and beyond.

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