In the real estate world, you'll hear the term "escrow" frequently throughout the process of buying or selling a home. If you take out a mortgage to pay for your home, you'll likely be dealing with escrow on an ongoing basis as well. So, just what is escrow and how does it work? Allow us to explain. 

Escrow Basics 

Escrow is a general term for a neutral third party who holds on to funding during the course of a transaction. While it is most commonly used in reference to real estate, it can be applied in other industries as well. The goal of escrow is to secure payment for a product or service while still allowing both parties involved the chance to back out of the deal without losing money to the other. At the conclusion of the transaction, the escrow agent will release the funds to the appropriate party. 

Escrow During the Buying Process 

When you make an offer on a home, you'll typically have to pay what is known as a good-faith deposit to verify that you are serious about purchasing the house. This money won't go directly to the seller, though; it will be held in an escrow account until you are ready to close on the home. This way, there is no risk of the seller trying to keep your money if the deal falls through. You'll make your down payment on the property into this escrow account as well. 

When you and the seller are ready to close the deal, the escrow company will release the funding to either your mortgage company or directly to the seller, depending on your specific situation. Once the funding is complete, the home is yours! 

Escrow After You Have Purchased Your Home 

If you have a mortgage on your home, you may have to keep adding money to an escrow account. This is because many lenders require you to make payments toward your property taxes and homeowners insurance as a condition of your loan. This way, they have a guarantee that the money will be readily available when the time comes to pay your annual taxes or renew your insurance coverage. You'll make your escrow payments on top of your monthly principal and interest payments for your mortgage, so keep this in mind when evaluating your monthly budget. 

Typically, property taxes and homeowners insurance are charged on an annual basis. However, most mortgage lenders will require you to make monthly payments into your escrow account to cover these expenses at the end of each year. In general, the amount you'll pay each month will constitute 1/12 of the annual payment, though some lenders may have different policies. Be sure to check with your lender to verify your exact payment schedule. If your tax or insurance rates change, your monthly payments will likely change as well, so your payments may not stay exactly the same over the life of your loan, even if you have a fixed interest rate. 

Start Looking for Your Dream Home Today 

If you are looking to buy a home in Southern California, the local experts here at Hanu Reddy Realty will be more than happy to assist you. We have a lot of experience in this region and can help you find the perfect home for you and your loved ones. We'll work with you throughout the process to ensure you understand your escrow requirements both as you buy the home and after the sale has closed. We invite you to reach out to us today to start viewing properties that may meet your needs.