A Homebuyer’s Guide to Escrow

Published

March 21, 2015

AJ Smith is an award-winning journalist with more than a decade of experience in television, radio, newspapers, magazines and online content. She currently serves as the managing editor for SmartAsset. AJ has a passion for meeting new people, sharing stories and helping others. She has degrees from Princeton University and Mississippi State University. AJ and her husband also write and illustrate educational children’s books.

Buying a home is likely one of the biggest financial decisions you will make in your life. And it comes with a lot of terms you may not encounter in your everyday life. One of these terms you’ll hear thrown around is “escrow.” But in case you aren’t exactly sure what escrow means or how it will affect your homebuying process, check out the details below.

Definition

Escrow is a deed, bond, money or piece of property held in trust by a third party for the two parties involved in a transaction. The funds are released once all obligations on both ends have been completed. This way the buyer is putting up the money but the seller doesn’t get it until certain criteria have been met, such as passing a home inspection. Escrow is not strictly a homebuying-related term but most people deal with the term when they’re buying a home.

In Practice

Escrow protects all parties from risk in a real estate transaction: the buyer, seller and lender. The account ensures the buyer is acting in good faith (that they have the money needed), gives time for the seller to meet obligations and proves to all other involved parties that the sale is on its way to becoming final.

Before you can buy your home, you have to pay closing costs. These are the various fees and charges a homebuyer must pay just before getting the keys and making it all official. When it comes to closing costs, the buyer often most put a certain number of months’ worth of homeowner’s insurance and property tax payments in escrow. This is usually required by the mortgage lender.

Some of the costs you have to pay on closing a home, like escrow, are not written in stone. Plenty of variables affect the overall price of your home and what fees you incur. There are some ways you can reduce how much you will pay in closing costs, but it’s important to understand and be prepared to pay some closing costs.