Escrow accounts are a tool that lenders use to hold funds for home buyers. These are separate bank accounts that are secure and house your earnest money deposit.
Essentially, a third party holds something of value that will be used at a later date to fulfill an obligation. Let’s take a look at the different ways escrow accounts can be used.
The main types of escrow accounts
There are different types of escrow accounts for different reasonings. However, the common theme is that each account is being monitored by a disinterested third party for safekeeping.
- Homebuying
This is one of the most common types of escrow accounts. During a Real Estate transaction, an earnest money deposit is held in escrow to protect both the buyer and the seller.
- Monthly payments
Homeowners can make payments into an escrow account at the same time as their monthly mortgage payment. This helps with larger annual expenses like insurance and property taxes.
- Renters
Renters and landlords can find escrow accounts useful for protecting each parties’ interests and settling disputes.
- Goods and services
If buyers and sellers desire a neutral third party to oversee payment, they may use an escrow account.
Buying or selling a home
Now, we’ve mentioned earnest money deposits a few times already, but what exactly is it? Simply put, it is the money you include with your offer to show the seller how serious you are about the property.
While the transaction is underway, you don’t want the seller to hold onto these funds in case the deal goes south. That is where the escrow account comes in. More often than not, the account is managed by the lender or title company.
Monthly payments
Most people often think that as long as they have enough money for their monthly payments they are set. However, annual payments such as homeowner’s insurance and property taxes can often catch you by surprise if you aren’t prepared.
This isn’t always required, but it isn’t a bad idea to make monthly payments to an escrow account in order to smooth out your expenses.
Renters
When renters make their security deposits, it may be required that some landlords hold onto these funds in an interest-bearing escrow account. This helps to easily keep track of the money and provide cushion for any repairs needed.
On the other hand, if there is a tenant/landlord dispute, renters can withhold their regular monthly payment and hold it in escrow until the issue is resolved.
Other
When exchanging money online, buyers and sellers can opt for escrow services to shop with a peace of mind. This is a secure way for buying and exchanging goods.
