What is escrow on a mortgage?

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    Jordan Moore
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    Team StellarFi
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    In an escrow, a third party temporarily holds money or property until the purchase is complete. This practice protects both the seller and the home buyer throughout the home-buying process. 

    A home is in escrow from the time the seller accepts the buyer’s offer and the sale is complete. During this time, the third party – usually a real estate company — holds the buyer’s earnest money deposit, the seller’s property deed, and other legal documents until all the terms of the purchase are met. Earnest money is the deposit the buyer pays to the seller to confirm their intention of buying the property. It forms a part of the home down payment at the closing of the deal. 

    The escrow account holds funds for property taxes and homeowner’s insurance throughout the loan period. The cost is spread over the monthly mortgage payments. The monthly mortgage payment is split into the principal, interest, and escrow amounts. The mortgage servicer may automatically pay the buyer’s property taxes and homeowner’s insurance when they are due automatically or it may send a check from the account so that the buyer can make the payments depending on how they have set up the account. 

    Lenders usually require an escrow account if your down payment is less than 20%. It is also applicable if you’ve taken out federal backed loans like the Federal Housing Administration (FHA) loan or United States Department of Agriculture (USDA) loan.

    An escrow helps you budget your mortgage expenses. If you find it difficult to make non-recurring large payments, an escrow account can help you put aside some money and make the payments on time.

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StellarFinance, Inc. and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

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