Escrow accounts are a secure way to manage the exchange of money and property between two parties. They are commonly used in real estate transactions, but can also be used for other types of transactions. In this article, we'll explain how escrow accounts work, the different types of escrow accounts, and how to cancel an escrow account. When you borrow money from a bank or direct mortgage lender, they'll usually give you an escrow account.
Borrowers who opt for a loan from USDA, VA Streamline Refinance or FHA, for example, must deposit funds into an escrow account as part of their monthly mortgage payment. Each month, the lender deposits the portion of the security deposit of your mortgage payment into the account and pays insurance premiums and real estate taxes when they are due. Your lender may require a “security cushion”, as allowed by state law, to cover unforeseen costs, such as a tax increase. If approved by the mortgage servicer, the escrow company will send you the remaining balance in the form of a check. When a buyer and seller initially reach a purchase agreement, they select a neutral third party to act as an escrow agent.
Depending on the reason for the escrow, the escrow agent may be a title company specializing in real estate, a bank or other financial institution, or a private person who has been entrusted with the function. In this scenario, the escrow account acts as a neutral place where the money is deposited until all the paperwork is finished and the house is officially yours. This type of contingency gives the buyer a specific amount of time to sell their current home before closing the security deposit on a new home. Until the final exchange is complete, both the buyer's deposit and the seller's property are said to be in custody. Each year, the mortgage servicer will review your account to ensure that you are paying the right amount to maintain the required minimum balance. Mortgage holders are required to send you an annual statement regarding the activity of their escrow account, which may also be referred to as a mortgage seizure account. If you meet the requirements of your mortgage servicer, you can choose to cancel your escrow account.
As a buyer, your funds will remain in the escrow account until you receive and approve the merchandise. Escrow accounts are an important part of many transactions and can help ensure that both parties get what they agreed upon. Understanding how they work can help you make informed decisions when it comes to buying or selling property.
