SS144: What is Escrow in Real Estate

SS144 What is Escrow in Real Estate

When purchasing a property, you will commonly hear the word “escrow” a number of times throughout the process. In this episode, Charles discusses what escrow means within the different contexts, and when it is used.

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Talking Points:

·        When you begin the process of looking to purchase a piece of real estate, one of the terms you will become familiar with is “escrow”.

·        Escrow is a financial instrument, usually an account, that is controlled by a neutral third party (typically an attorney or title company); on behalf of two other parties in a financial transaction, such as a property transfer. Funds are held in an escrow account until certain conditions have been met (within the realm of real estate, this will be the closing day).

·        Most property owners will be involved with escrow, in one form or another, from the time they put an offer in on a property, to the time they pay off their mortgage.

·         There are 3 main types of escrow accounts, with the first 2, being the most common.

o   The first is the escrow account used for purchasing a property. The purchase and sale agreement of a property will include a provision that states the buyer make an earnest money deposit (typically of 1%-3% of the purchase price), once their offer is accepted, and that deposit will be held in an escrow account until closing occurs, at which time, the funds would go towards the buyer’s down payment, and closing costs. If the contract becomes void, the funds could end up with either the buyer or seller, depending on the terms of the agreement. (To learn more about earnest money deposits, check out episode ss136).

§  This escrow account helps to protect both the seller and the buyer during the property sale process and helps to keep both parties on track to closing.

o   The second type of escrow account is known as the mortgage escrow account or the impound account. This escrow account is utilized once the buyer has purchased the property, and it is managed by your lender or the mortgage servicer. The funds that are escrowed are used to pay; property taxes, homeowners’ insurance, and mortgage insurance (if applicable). Part of the borrower’s monthly mortgage payment will include a portion that will fund the escrow account with the lender. The lender will then pay the taxes, and insurance premiums as they become due.

§  This escrow account runs off estimates since the servicer does not know 100% what taxes will be next year or what your insurance premium will be on renewal. With most fixed loans, the interest rate is fixed so the principal and interest portion will remain constant throughout the loan term however; taxes and insurance will change regularly. Your mortgage statement will include an escrow analysis statement that will show you; how much they received from you the borrower, how much was paid out, and how much your monthly escrow portion will increase or decrease depending on your taxes, and insurance owed.

§  The mortgage escrow account also allows the borrower the ease of having a set payment over the course of the year (until premiums readjust), which helps with budgeting.

o   The third type of escrow account is not as common but, may still be required if there are any unresolved issues at closing. Maybe the seller left a pile of old furniture in the backyard that was expected to be cleaned up or was supposed to replace the hot water heater, and these tasks were never completed. Instead of pushing back closing, the buyer and seller may agree to have escrow hold a portion of the seller’s funds until the issues are resolved in a set timeframe or the funds revert to the buyer.

Transcript:

Charles:
Welcome to Strategy Saturday; I’m Charles Carillo and today we’re going to be discussing what is escrow and real estate.

Charles:
Have you always wanted to invest in real estate, but didn’t have the time, didn’t know where to find the deals, couldn’t get the funding and didn’t want tenants calling you. Since 2006, I’ve been buying income producing properties and great locations that provide us with consistent passive income. While we wait for appreciation in the future and take advantage of tax laws while we’re waiting and unlike your financial advisor, we invest alongside our investors in every property we purchase. Check out to investwithharborside.com. If you like the idea of investing real estate, if you like the idea of passive income partner with us at investwithharborside.com, that’s investwithharborside.com.

Charles:
When you be in the process of looking to purchase a piece of real estate, one of the terms you’ll become familiar with is escrow. Escrow is a financial instrument, usually an account that’s controlled by a neutral third party, typically an attorney or title company on behalf of two other parties and a financial transaction such as a property transfer. Funds are held in an escrow account until certain conditions have been met within the realm of real estate. This will be the closing day when those funds are released. Most property owners will be involved with escrow in one form or another from the time they put an offer in on a property to the time they pay off their mortgage. There were three main types of escrow accounts with the first beat, two being the most common. So the first is the escrow account used for purchasing a property. Now the purchase and sale agreement of a property will include a provision that states the buyer, uh, to make an earnest money deposit typically of one to 3% of the purchase price once their offer accepted.

Charles:
And that deposit is gonna be held in an escrow account until closing occurs, at which time the funds would go towards the buyer’s down payment and closing costs if the contract becomes void and the funds could end up with either the buyer or the seller depending on the terms of the agreement. To learn more about earnest money and deposits, check checkout episode ssss 1 36. Now this escrow account helps to protect both the seller and the buyer during the property sale process and helps to keep both parties on track to closing. Now, the second type of escrow account is known as the mortgage escrow account or the impound account. Now this escrow account is utilized once the buyer has purchased the property and is managed by your lender or the mortgage servicer. The funds that are escrowed are used to pay property taxes, homeowners insurance, and mortgage insurance if a applicable in that mortgage.

Charles:
Now, part of the borrower’s monthly mortgage payment will include a portion and that will fund the escrow account with the lender. The lender will then pay the taxes, the insurance premiums as they become due. Now this escrow account runs off estimates since the servicer does not know 100% what taxes will be next year or what your insurance premium will be on the renewal. With most fixed loans, the interest rate is fixed, so the principal interest portion will remain constant throughout the term of the loan. However, taxes insurance will change regularly. Your mortgage statement will include an escrow analysis statement that will show up and it will allow you to see how much they have received from you, the borrower, how much was paid out, and how much your monthly escrow portion will increase or decrease depending on your taxes and insurance owed. Now, the mortgage escrow account also allows the borrower to the ease of having a set payment over the course of the year until premiums readjust, which helps with budgeting.

Charles:
Now the third type of escrow account is not as common, but may still be required if there are any unresolved issues at closing, maybe the seller left the pile of old furniture in the backyard and that was expected to be cleaned up, or they were supposed to replace the hot water heater and these tasks were never completed. Instead of pushing back the closing, the buyer and the seller may agree to have an escrow hold, have escrow, hold a portion of the seller’s funds until the issues are resolved in a set timeframe or the funds will revert to the buyer. So I hope you enjoyed. Please remember to rate, review, subscribe, submit comments and potential show topics at globalinvestorspodcast.com. Look forward to two more episodes next week. See you then.

Announcer:
Nothing in this episode should be considered specific, personal or professional advice. Any investment opportunities mentioned on this podcast are limited to accredited investors. Any investments will only be made with proper disclosure, subscription documentation, and are subject to all applicable laws. Please consult an appropriate tax legal, real estate, financial or business professional for individualized advice. Opinions of guests are their own information is not guaranteed. All investment strategies have the potential for profit or loss. The host is operating on behalf of Syndication Superstar, LLC, exclusively.

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