Whats it mean when your house is in escrow?

[papa0881]

My wifes co worker always tells my wife we have our home in escrow? What does this mean? The bank holds money or what? Explain I read alot about this in todays world and cant understand what it is?

[HHM]

Might need a little more context to give you an answer...

The straight legal definition is simply that a person deposits an asset (cash, real estate, etc) with a neutral third party to hold in trust until certain conditions are met. That deposit account is called an escrow account.

But typically, in real estate, it just means that a sale of real estate is pending. That an offer has been made and accepted and earnest money has been deposited and the parties are working toward closing the deal (i.e finishing-up getting financing, title documents, etc). Strictly speaking, the "house" is not in escrow, but all the money to purchase the home is placed in escrow until all documents are signed etc (i.e. closing).

Thus, most persons simply refer to this time between the acceptance of an offer to buy real estate, and closing of the deal as "escrow". (even though such an understanding is technically inaccurate).

[papa0881]

so does that mean that they actually have almost all the money to purchase the home? or is it just to see if you want to buy, still a little confused. Why wouldnt they just pay every single payment to a loan bank or something? she says that all insurance money, house payments, etc are palced in this account

[HHM]

Like I said above, we may need a little more context. Sounds like you are referring to the payment escrow account that "may" exist during the repayment period of the loan.

If the house has already been purchased, and the owner is making payments, the "escrow" account is where the surplus funds that the owner pays in their monthly payment to usually cover Property Taxes, sometimes insurance, etc. The bank holds that money in trust, and will pay the owners property taxes on a quarterly basis. (you can also escrow home owners insurance, PMI, if you have it etc).

For example, an escrow account usually works like this...lets say that your mortgage payment is $1400 and the loan is set up with an escrow account to pay home owners insurance and property taxes. The Owner (the borrower) only makes one payment to their bank. Of the $1,400, lets assume $1,200 is the principal and interest payment (P&I). P&I is your base house payment and this money goes to the bank. The additional $200 is set aside by the bank in a trust account (i.e. an escrow account); then, typically, on a quarterly basis, the bank will withdraw funds from that escrow account to pay the owners property taxes and/or home owners insurance.

It is not a necessary feature of mortgages, but assuming you get your own homeowners insurance (you can tell the bank to pay whomever you like for HOI), it is usually a fairly convenient service. An Escrow fund is why many first time buyers get sticker shock at the mortgage payment since the payment includes funds other than simply paying down principle an interest. Thus, if you go to a website like bankrate.com and use their mortgage calculator, the estimated monthly payment you see is simply P&I, the escrow funds typically increases the payment by 10-25% depending on the state. Like I said, there is nothing wrong with escrow accounts and they are fairly convenient (you would be paying that money anyway for insurance and property taxes on your own if you had not escrow account).

[Minnymouth]

Having your insurance, property taxes, etc put into an escrow account monthly SAVES your butt at the end of the year trying to come up with big bucks to pay property taxes, insurance for the next year. This is a convenience the mortgage company offers you and most use it.... takes the hassle out of life a little. Its easier to put it aside each month, then cough it up at the end of the year in one lump sum...
The mortgage company pays it for you and notifies you that its been paid....
Works good for me, would be hard to come up with that much money right during the holidays..... so its a win, win situation for a lot of people.
It doesn't change the cost of your insurance or your property taxes.... they remain the same...

[fred333]

I will have to look into that escrow thing. Sounds like a nice way to save some money.