When it comes to buying a home for the first time, you will undoubtedly hear many terms and phrases that you may not recognize. One of the most common questions is what is escrow in a mortgage? After all, it may be a significant amount. So, it makes sense to want to understand exactly what escrow means. In addition, you may see other phrases such as “escrow payment” and “escrow account.” It may seem overwhelming at first, but we will help you understand exactly what escrow is in a mortgage and what these terms mean.
What is Escrow?
Escrow is a legal agreement where a third party will hold onto money or property until agreed upon terms are met before releasing. In the home buying process, when you arrive at a purchase agreement, you typically give some money to a neutral third party to hold. This is also sometimes called earnest money. It shows the seller you are serious about buying. In return, the seller will not entertain other offers on the property. In this scenario, the property and the money are in escrow until the final sale. When Property Buyer Connect makes an offer to buy your Philadelphia house, we will offer a cash deposit to be held in escrow at a title company.
Many people mistakenly confuse this payment with their initial down payment on their new home. In comparison, the down payment is your initial contribution of money going directly towards the purchase price of the home. Generally, this payment may range from 1%-3% of the property price while your down payment is significantly higher. The escrow payment is usually applied as a portion of your down payment when the sale goes through. Most purchase agreements state that your escrow payment gets returned to you if the seller fails to meet any contingencies. A failed home inspection is one example.
What is an Escrow Account?
You may also hear the term escrow account. This refers to an account with your mortgage lender after you’ve purchased your home. Each month, when you pay your mortgage, a portion of your payment will go into this account. The most common uses for this money is to pay your taxes and insurance. It is much easier to divide these costs up per month rather than paying larger sums less frequently. The payments will then come out of this account when they are due.
Ready to Buy or Sell Your Philadelphia Home?
We know that the home buying or selling process is intimidating. We make the process simple and take care of everything so you can relax. Contact us today for any questions about buying or selling your Philly area home.