What is Escrow?

  • September 26, 2014

When you buy a home and choose a mortgage, you’ll hear the word ‘escrow’ come up in your conversations with your real estate agent and lender. So what is escrow, how does it work and why is it important? Let’s take a closer look.
 
 
What is escrow?
 
‘Escrow’ actually has two meanings and each is relevant at different times during the home buying process:
 
1. The first use of ‘escrow’ applies when you make a purchase offer on your new home. You’re asked to write an earnest money check that is ‘put in escrow,’ meaning the funds are held by an impartial third party while you negotiate the sales contract with the seller.
 
2. Once the sale is finalized, your mortgage lender—such as CMG Financial—will open an ‘escrow account,’ which collects and holds your annual property taxes and homeowner’s insurance premiums until they need to be paid.
 
 
How does an escrow account work?
 
Your monthly mortgage payment is divided into four parts: principal, interest, taxes and insurance (you may see them referred to as PITI). The first two parts—monthly principal and interest—pay off your loan. The third part is your annual real estate tax bill, which is divided into 12 monthly installments. The fourth part is your annual homeowner’s insurance bill, also divided into 12 monthly installments.
 
When you make a monthly payment, the principal and interest are paid to your lender. The taxes and insurance are held in your escrow account until those bills are due. Then, your escrow account automatically pays them.
 
 
Why is having an escrow account important?
 
There are several reasons why escrow accounts make sense—and why CMG Financial will take care of managing yours:
 
· Convenience: Your escrow account will run quietly in the background, so you’ll never have to think about it. Every month, it will simply accumulate the funds you’ll need for taxes and insurance.
 
· Budgeting: Think for a moment about how large your new home’s tax and insurance obligations will be. Then imagine having to write a check for the entire amount all at once! With an escrow account, we take that worry away. Think of it as a savings account that grows to exactly how much money you need—exactly when you need it.
 
· Confidence: Having an escrow account guarantees that you’ll never be late with your tax and insurance payments. You won’t have to remember the due dates or amounts.
 
 
Escrow might sound a little complicated at first, but it doesn’t have to be. At CMG Financial, we’ll make sure you understand the four parts of your mortgage payment (PITI) and how your escrow account will always be there to take care of the last two. Just like we’ll always be here to take care of you.

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