There are a lot of costs included in a real estate purchase transaction. Different departments work diligently to make sure that your transaction is completed on time.
All these departments have fees that would be usually charged to the buyer at the end of closing.
One of such fees is called the escrow fee. In this post, we will understand what is escrow fees in detail.
Before we jump into escrow fees let’s first understand escrow and escrow accounts.
An escrow is a neutral third party who makes sure that all the terms that are in the agreed-upon contract are fulfilled before the transaction is complete. The escrow companies work for both seller and the buyer.
Once the sales contract is signed between the buyer and the seller, the escrow officer is responsible to take the earnest money deposit from the buyer and hold it in an escrow account.
Along with that, the escrow officer will ensure that all the conditions in the contract are met so that the transaction could be closed smoothly.
The escrow account is a temporary account created by the escrow company once the sales contract is signed between the seller and the buyer.
This account is used to hold funds that would be disbursed upon completion of the real estate transaction.
These funds will be disbursed only after all the conditions that are set up in the contract are settled.
After the initial sales contract is signed between the buyer and the seller, the buyer will give an earnest money deposit check to the escrow company which will be held in this escrow account.
The earnest money deposit check given by the buyer acts as a commitment to purchase the property.
Some common conditions in the contract are the buyer acquiring a mortgage and passing the property inspection.
A mortgage escrow account is when a borrower chooses to pay his homeowner’s insurance and property taxes every month along with his mortgage payments.
These payments are saved in an escrow account maintained by the lender. The borrower will pay the taxes and insurance amount monthly to the lender, and the lender will pay the taxes and insurance when they are due from the escrow account.
An escrow fee is a fee paid to the escrow company for providing escrow services that are determined by the property purchase price.
The job of the escrow company is to hold and disburse money to different parties involved in a real estate transaction, co-ordinating will all the parties involved in the signing of the documents, maintaining the accuracy of paperwork, make sure all the parties adhere to the contract and take the liability of holding funds in their position till the transaction is complete.
The escrow fees could be anywhere between one to two percent of the property purchase price.
For example, if you are planning to buy a property worth $300,000, the escrow fees would be anywhere between $3000 to $6000.
There is also a base fee charged for the escrow services. All things considered, the actual escrow fee could vary depending on the escrow company as there are no regulations for these fees and every company may charge different fees for their escrow service.
The escrow fees are subject to negotiation between the buyer and the seller through their respective realtors.
One of the common ways to go forward with paying the fees is to split the fees between buyer and seller.
Depending on the outcome of the negotiation, the escrow fees could be either paid by the buyer or by the seller through seller concession.
Escrow fees are one of the substantial costs in a real estate purchase transaction. The buyer and seller should have a basic idea about the cost of the escrow services.
Your real estate agent would be the best person to help you choose the escrow company that works diligently and provides the best escrow services in the market.
This word escrow gets used a lot throughout a purchase, sale, or even in investment transactions and it can be used in a few different ways.
In this post, we are going to focus on the idea of an escrow account and we will also get some context as to when that will be used and why.
An escrow account is a bank account that holds funds is sort of a neutral third party type situation.
In the state of Texas, most escrow accounts are managed through the title companies in residential transactions.
This account is where money like earnest money deposit would be held. The money that is being held between a buyer and a seller. Those funds are used as dictated by the term of the contract which could contain multiple scenarios.
There could be hundreds and thousands of scenarios, however, what matters is for you to understand that funds can be protected in a transaction between two parties.
Most of the realtors make sure that the transaction between the buyer and the seller is not confrontational. However, there could always be some skepticism or lack of trust for an individual to write a check to an unknown person.
Those funds can sit in an escrow account and be held by a neutral third party who is simply tasked with making sure that the terms of the agreement are acted upon and those funds go to the right place when those things happen.
As a potential buyer, seller, or investor if you are trying to know about the escrow account the other most common time an escrow account is used is when you pay more than your principal and interest on your mortgage payment.
This is very different from the buy or sale process.
This is for the buyers who have already purchased a home and have started making payments for a mortgage.
Most mortgage payments include principal and interest which is the amount that you owe on the loan and the interest you are paying on the loan.
And it is entirely common that you would also pay property taxes and/or homeowners insurance every month in your payment.
In this, the taxes and insurance piece of your monthly payment are only paid once per year when they are due but you pay them every month and they build up in an account called an escrow account.
This escrow account is managed by the lender or bank that is servicing your mortgage. You pay principal and interest every month that goes towards your loan.
You pay taxes and insurance that is accumulated in an escrow account for up to 12 months and your lender or bank will pay the full insurance and property taxes for the year.
Most of the time you have to put 20% down to waive the escrows. The reason for that is it’s a little bit riskier to waive the escrow because now you are responsible to make those tax payments and the insurance payment.
So when those bills come due, you have to pay them otherwise you risk penalties of not paying taxes and insurance.
If you are escrowing, it becomes easy for you. You don’t have to worry about paying a hefty amount for the entire year for your taxes and insurance.
When you have an escrow account set up for your taxes and insurance with your lender or bank, you make a monthly payment for them for an estimated taxes and insurance for a year.
But what if the taxes in your county are increased or your insurance premium increased in a specific year.
Usually, the lender overestimates the escrow payments so that the account does not fall short of the taxes and insurance when they are due.
However, there are many cases where the county assesses and increases the property taxes and it could be possible that the amount in the escrow account may not be enough to cover those.
This is called escrow shortage. You would receive a letter or intimation from your lender to make sure that there is no escrow shortage in your escrow account.
So this is a gist of how escrow payments work.
It really is just taking these bills that are due on an annual basis and prorating them into monthly amounts, setting them into accounts so that you always have the money when the bill is due.