How does escrow work in the U.S.? I’m familiar with the term, but we don’t use it up here - just curious about the mechanics and obligations of escrow.
Thanks.
Basically, the lender estimates the amount of taxes and insurance (the two items most escrowed) the borrower will have to pay over the next 12 months. That amount is then added to the mortgage payment in 12 equal installments. The lender is then responsible for paying the tax authorities and insurance company when the bills come due.
For instance, say your mortgage payment is $1000 per month. Your estimated property taxes are $1200 and your annual insurance premium is $600. Your monthly payment to the lender would be $1150 ($1000 mortgage +1/12 annual taxes +1/12 annual insurance).
Comprende, or clear as mud?
Give some context. Do you mean in terms of real estate, such as the “escrow accounts” many people have in connection with their mortgages, in terms of judicial settlements, or some other context?
For mortgages, the rules governing them differ from state to state, but many mortgages have escrow accounts that are used to pay the property taxes and/or homeowner’s insurance. The mortgage payment includes a deposit to the escrow account (which can change over time), and the homeowner does not directly pay the insurance company or the real estate taxes. The mortgage lender takes care of it. State laws differ regarding whether lenders may require escrow accounts. In some states, like CA, the lender is required to pay interest on the escrow account.
Real estate person here. An escrow account is a separate account where you put money given to you by person A that will, if the deal goes right, be given to person B. If you (person A) want to buy person’s B house and put $50,000 down, you do not want to give that $50K to person B until the deal is done, least he abscound with it. So you give it to us (person C) who holds it in the escrow account until the deal is closed and then gives it to person B, who wanted to make sure you actually had the money and wasn’t just jerking his chain for the two months the property would have been tied up with your deal.
In the mortgage example above, the mortgage company doesn’t want you to lose the house for not paying the taxes. So they collect the money as part of your mortgage payment and hold it until it’s time for them to pay it to the government.
Anyone who messes with the funds in their escrow account will probably lose their licenses. It is a very serious legal matter to take money that isn’t yours and use it.
Interesting - there’s more than one meaning to it, which I did not know.
I was thinking of the real estate deal which Annie-Xmas described - I thought the escrow agent would be a third party, but wasn’t sure how it worked.
I didn’t appreciate that it was also used for mortgages, so that’s new info for me - thanks.
We don’t have escrow agents in my jurisdiction in Canada - we handle it by trust conditions between the solicitors handling the real estate deal. For mortgages, since taxes and insurance are paid monthly, I don’t think there is any need for a separate escrow account with your mortgage.
Incidentally, one some mortgages the escrow amount and needed payment is recalculated monthly.
Some less educated US consumers don’t realize this and get mad when their mortgage and escrow payment jumps by $100 because their house appreciated and their taxes just went up.
Also, in some situations you can wind up with a large enough deficiency that the escrow gets depleted and you wind up with a $1000 payment that needs made RIGHT THEN.
It’s one of many good reasons not to buy a house unless you have $10K sitting in the bank.