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What Is Escrow, And How Does It Work?

July 28, 2020 | By Reef Merhi

Table Of Contents

What Is Escrow?

An escrow account is maintained by a third party. There are two types of escrow.

Real estate escrow is different from homeowner’s escrow. When you decide to buy a home, you will need to open an escrow account. You will pay a deposit to the seller of 1-3%. This is real estate escrow.

In exchange for the deposit, the seller will take the house off the market and make necessary repairs.

Keeping the money in a third-party escrow account doesn’t just protect the seller. It also protects you from losing money if they don’t hold up their end of the deal.

After you close on your new house in Texas, your lender holds homeowner’s insurance and property taxes in an escrow account to ensure those expenses are paid on time. This is homeowner’s escrow.

Lenders are at risk if these expenses aren’t paid. If these expenses are included in your monthly house payment, the funds will be held in an escrow account.

You’ll need to keep several months’ worth of escrow in the account in case premiums increase.

Escrow keeps the process fair and protects the interests of the buyer, seller, and lender.

If you want to get a mortgage and buy a house, you’ll need to open an escrow account and have a clear understanding of how it works.

How Escrow Works

Your monthly mortgage payment can be broken down into four parts.

  • Principal
  • Interest
  • Taxes
  • Insurance

Taxes and insurance go into the escrow account to protect you from losing your home and your lender from losing money.

Your escrow account is a safety cushion for you. You won’t have to budget for taxes and insurance because they will be deposited into your escrow account when you pay your mortgage each month.

When the expenses come due each year, your lender will remove the funds from the escrow account and pay the insurance and property tax. You don’t have to remember to make the payments. They will be automatically deducted.

I’m Selling My Texas Home. What Happens Now?

If you’re selling your home, there’s no need to worry.

Regulations require your lender to refund any money in your escrow account within one month after you sell your home.

You can use your escrow money to pay down the principal of your new home if you’re upgrading to something more expensive.

Do I Have To Get An Escrow Account?

Many of our buyers in Houston, Texas often wonder if they really need to open an escrow account.

Avoiding escrow is almost impossible, especially if you are a first-time buyer.

If you’ve had a mortgage for at least a year, you may be able to avoid escrow, but it’s much easier and safer to open the account.

Escrow is a normal part of the buying process and it ensures your homeowner’s expenses will be paid on-time and in-full.

If you’re buying a home in Houston, you’ll need to find an escrow agent in your area that you and the seller agree to use. Real estate lawyers and loan officers can act as escrow agents so we can help you out with that.

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