If you’ve been saving and saving, getting ready to purchase your first home or condo, you may have heard the term escrow and not really known exactly what it means. Don’t fear—it’s a term that many first-time homebuyers don’t understand completely.
In essence, you will deal with funding your escrow twice during the home-buying process: first, when you put an offer on a house or condo, and second, at the mortgage closing.
The earnest money you pay as part of a property offer—often between 1% and 3%—will go toward your escrow to purchase of the home once the inspection clears. If you back out of a property deal after the inspection process, that money will go toward the homeowner, who has lost out on a buyer.
Once you reach your mortgage closing date (about 60 to 90 days from an accepted offer), you’ll notice that the escrow amount of your payment has grown as you sift through all the paperwork. Your lender evaluates what your property taxes will be, what your homeowners’ insurance will be and includes that amount in your monthly mortgage payment. That amount is your escrow to pay those throughout the year.
Your escrow also includes all title costs, real estate agent fees and lender fees as part of the closing costs.
None of the money in the escrow officially changes hands until you finalize the deal.
Also, each year, you will receive a property tax statement, often giving you a new amount for your mortgage payment. This is part of your escrow and based on what your lender estimates your home value to be and any increase in property taxes. Major home improvements or property value increases in your area will increase your home’s value and property taxes.
If you are buying a home with a private loan from a friend or relative or buying a home jointly with others, you’ll want to consult an experienced real estate attorney in addition to working with your real estate agent. Also, agreeing on a rent-to-own arrangement with a property owner also warrants a lawyer’s review, as well as if you need to evict a current tenant from a home.
Buying your first home often is a stressful, long process. A qualified real estate agent will help guide you, and in some cases, you’ll want an attorney to review the deal, making sure your interests are protected. Then you can enjoy your property for years to come.