When buying your first home, it's easy to get caught up in the various new terminology for things. Some things like insurance, interest rate, conditions, home inspections are fairly straightforward, but escrow may be a whole new term to you. To ease any confusion, here's a quick summary of what an escrow account it and how it differs from the escrow process when buying your first home.
What Is An Escrow Account?
Escrow accounts are sometimes called "impound" accounts. These accounts are set up to help manage payments of property taxes and homeowner's insurance. Depending on the individual requirements of the lender, you may be asked to pay as much as one-quarter of these upfront and they will be put into the account for the purposes of making payments.
How Does An Escrow Account Differ From The Escrow Process?
Buying and selling real estate is a significant transaction. As a buyer, you're putting thousands of your hard-earned dollars on the table, along with borrowed money. As a seller, you're putting your long-time investment on the line. While we always want to assume everyone has the best intentions, when the stakes are this high, it's important that each party feels protected. That's where an escrow process comes in. You bring in a third-party individual or company to hold on to the assets until both parties meet their obligations.
Who Controls Escrow Accounts?
Lenders have complete control over escrow accounts. However, Scottsdale homeowners are entitled to receive an annual statement advising them of their escrow balance. If there is an increase or decrease in insurance payments through the year, a homeowner may request the lender evaluates the escrow account and change the amount that is paid.
Is Interest Paid On Escrow Accounts?
There is no mandate to pay interest on escrow accounts. When you refinance your home, the funds for your taxes and insurance are calculated into your overall payment. The portion that is to be used to pay taxes and insurance is placed in escrow. Arizona laws do not require lenders to pay interest on these accounts.
What Happens If I Sell My home Or Refinance?
When you sell or refinance your Scottsdale home, your escrow account will be credited at closing. The amount may be used to lower your out-of-pocket costs or may be turned over to you as a direct payment.
What Happens If There Is Not Enough/Too Much Money In Escrow?
If your lender has underestimated your escrow payments, they may request you send an additional payment to make up the difference. In the event you are paying too much into escrow, your lender has the discretion to release the overage amount directly to you. In most cases, shortfalls or overages of $50 or less are typically not a major concern.
If your lender requires you to have an escrow account for the taxes and insurance portion of your mortgage payment, it can be very helpful. Escrow accounts help ensure you do not have to come up with a large payment once a year for insurance or quarterly for taxes. In some cases, if a lender does not require an escrow account, as a borrower, you may request they escrow your taxes and insurance for convenience.
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