You have decided to buy a house and started organizing the necessary documents. While doing so, you came across the term “escrow”.
You have done a lot of preparation, but this is something new for you. So, you go on to search what an escrow account is.
You went through a bunch of websites yet are still confused about it. Well, if that is the case then this blog will certainly help you understand what escrow is.
Let us get started.
What is an Escrow?
- Escrow is the third-party service used in any house sale.
- An escrow agent is hired when the buyer and seller reach an agreement.
- The seller opens an escrow account with a title company.
- The escrow account holds all the necessary documents as well as a percentage of the selling price. This is until all the required conditions are met.
- Escrow accounts are not widely used in Canada as much as they are in the United States.
How Does Escrow Work?
One of the things you are responsible for when you buy a house and take out a mortgage is paying the annual property taxes.
These payments are made annually. Yet, the lender requires a monthly payment to accumulate the balance in your escrow account. So, the tax portion will stay in the escrow account whenever you make a payment.
Your annual property tax amount will be divided into monthly or biweekly segments. If you choose to have your lender collect your taxes in escrow, you will be doing this.
Escrow accounts help lenders keep track of their mortgages.
Do You Need An Escrow Account?
A significant proportion of lenders will need you to use an escrow account to pay your bills. If you say no to the escrow account, there is a chance that the lender might cost you a penalty or an increased interest rate.
You can decide to make the property tax and home insurance payments instead of opting for escrow. Only you will have to keep track of the due dates for payments and avoid any penalties.
Purchasing a home can be both overwhelming and exciting. It is best to stay ahead of the game and learn everything there is to know about purchasing a home. Read ‘First-time home buyers guide’ to know more.