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What is Escrow?

Escrow is a legal agreement in which a third party controls money or assets until two other parties involved in a transaction meet certain conditions. Think of escrow as a mediator that reduces risk on both sides of a transaction, in this case, the sale, purchase, and ownership of a home.

In the world of home buying, escrow accounts are still commonly established to protect the financial interests of buyers, sellers, and any other parties involved in a purchase, sale or refinance. In many cases, escrow also comes into play after a mortgage is finalized

To protect all parties involved in the transaction, money will be deposited into an escrow account for safekeeping. This account is created and managed by a neutral third party, known as the escrow agent. Depending on where the home is located, the escrow agent can be a participating broker, a title company, or a real estate attorney.

Types of Escrow Accounts:

Refinance escrow accounts- When you refinance your mortgage, you’ll use an escrow account to deposit money for things like appraisal fees and attorney fees. Once you finalize the terms of your new loan agreement, money will be distributed to the appropriate parties at closing. The distributions may include broker fees or commissions; appraisal, pest and inspection fees; or any cash out to the borrower.

Mortgage escrow accounts- Your lender may require you to keep an escrow account after closing. Unlike a bank account that's in your name, an escrow account is opened and managed entirely by your mortgage servicer. All you need to do is make your monthly mortgage payments, and a portion will automatically deposit into your escrow account.

An escrow account is sometimes required, and sometimes it’s not. It depends on the type of loan you get, as well as your financial profile. It may be tempting to go without an escrow account because it could mean a lower monthly mortgage payment but escrow can actually provide peace of mind by removing your responsibility to make sure those important bills get paid.

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