What is Escrow in a Home Purchase?

If you’re purchasing a home, the terminology, paperwork and sheer number of steps involved in the home buying process can definitely be overwhelming. One term many people are unfamiliar with is “escrow.”


What Does Escrow Mean?

An escrow account holds money to be used to pay for expenses other than the mortgage payment. This can include property taxes, homeowner’s insurance and other costs associated with owning a home. Some lenders may refer to escrow as a reserve or impound account.

There is also an escrow involved in the purchase process. In most cases, this escrow will close when the home transfers ownership. This is not merely a bank account. Your escrow officer is an impartial third party who handles all incoming paperwork and funds, arranges the title search and sets your closing date. This is a separate escrow from the escrow account your lender will set up.

What Does Escrow Pay For?

Your mortgage payment breaks down into three parts:

  • Interest
  • Principal
  • Escrow

Each month, you’ll pay interest on your loan and chip away at the principal loan amount. The rest of your payment goes into escrow to pay other costs associated with the ownership of your home. This is often a way to spread a large annual payment, such as your property tax, into 12 smaller (and more affordable) payments.

From the escrow account, your lender will pay:

  • Property taxes
  • Homeowner’s insurance
  • Flood insurance
  • Private mortgage insurance

Annual Escrow Review

Once a year, your lender will review your escrow account to ensure you’ll have enough to cover these expenses. Taxes and insurance premiums change over time. Therefore, lenders require that you keep a minimum balance in your escrow account at all times. This minimum may vary by lender but will not be more than 2 months of escrow payments.

Do You Need Help With Your Real Estate Transaction?

Most people find that it pays to work with knowledgeable, experienced title insurance agents—and that’s why people all over Middle Tennessee continue working with Smart Title and Escrow.

Call us at 615-393-6222 or get in touch with us online. We’d love to help you the way we’ve helped so many others in Franklin, Cool Springs, Nashville and Murfreesboro.


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By | 2016-12-27T18:10:12+00:00 July 7th, 2016|Categories: Title & Escrow FAQ|Tags: , , |0 Comments

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