What Is Escrow?
In this episode of Tuesday Morning Coffee John tells us what escrow is, and how it is beneficial to the home owner as well as the lender.
JOHN: Hey, guys. John Jones here with another edition of Tuesday Morning Coffee. I hope everybody had a great Thanksgiving. Guys, today what we’re going to talk about is escrow and what does that term mean. It’s a pretty general term, but mainly around here we use it when we’re talking about our insurance and taxes being paid to the bank every month into an escrow account. Out on the West Coast, they use the term more so you hear about it whenever they have a pending closing, they say it’s closing in escrow.
But really the best definition I could give for escrow or the best maybe analogy I can give is when a third party holds the money until something is resolved. In other words, if you had a bet with a friend and you wanted somebody to hold that money until that wager is resolved. That’s kind of what an escrow account does or an escrow agent. So in terms of the way we use it the most is escrow in taxes and insurance. Why does a lender want that to happen?
Well, the lender wants to know that those items are always current and being paid on time. That protects the lender. They want to know if insurance is always on that house so if that home catches fire, the lender is protected. They want to make sure the taxes are always current so there’s not a tax sale on the property and the lender gets kind of held out in the cold on that. So it protects the lender.
How does it benefit to the homeowner? Well, it a benefit in the fact that it’s something the homeowner can budget every month. They can spread their taxes over 12 months. So each month they pay 1/12 taxes, 1/12 insurance. It’s in their payment. They can budget for it and they also have the peace of mind knowing that those items are always taken care of instead of receiving a big tax bill at the end of the year along with all the other obligations you have at the end of the year.
So I hope that helps clarify what escrow is. If you should have any questions about escrow or any other real estate related matters, please give us a call. We’re always here to try to help you, 867-3020.