Escrow: all you need to know

Property transactions usually involve escrow, but not everyone has a good understanding of what escrow actually is used for and why it's so important. Here's what to consider when you're thinking about buying, selling, or refinancing a property.

When you use escrow in a property transaction, it's generally for one of two reasons. Either you're buying or selling a piece of property, or you're having property taxes and homeowners insurance included in your mortgage payment. When you get involved in a property transaction, you'll likely use a title company for the closing. That can make escrow easy, because the title company will be the legal and neutral third party that holds any funds in escrow, for your transaction. For insurance and property tax, your mortgage company will hold out money from every monthly payment. Then, they will pay your insurance and taxes when those things come due. That way, both you and your lender has the security of knowing that the taxes are being paid on the property, and the insurance coverage is protecting your investment and interests. While not all mortgage companies require insurance and taxes to be escrowed, most of them will.

While there are some important reasons to use escrow, but the biggest and main reason is the protection it offers to all parties involved. Buyers and sellers have peace of mind during property transactions when the title company escrows funds. Mortgage companies can lend more easily, when they know the property taxes and insurance are being paid through escrowed funds. Understanding the value of escrow can help buyers, sellers, and refinancing homeowners feel better about their title company choices, too.