What Is Escrow In Mortgage Loans?

Two types of escrow in mortgage loans explained.

Real estate transactions, with all the associated terminology, can be complicated affairs with myriad details and loose ends. Some of the terminology and processes are difficult to grasp the meaning of. The function of escrow in mortgage loans, however, is easy to understand.

What Escrow Is

When two people enter into a transaction involving valuable property they require a neutral third party to hold the property and money related to the transaction. These third party entities are known as escrow companies. The individual who acts in this capacity is called an escrow agent or escrow officer. The escrow agent holds deeds, money, bonds or other valuable business or personal property. These items are deposited by one party for delivery to a second party when specified requirements or conditions are met.

Two Types of Escrow in Mortgage Loans

When a buyer makes an offer that is accepted by the seller the real estate transaction begins. An escrow company is chosen to hold the property deed, loan documents, the down payment, title insurance policy, tax statements etc. The mortgage lender usually chooses the company. When a sale is “in escrow”, it is pending the fulfillment of all the terms of the buyer‘s and seller‘s agreement. Escrow is completed when all the conditions of the sale are met, all documents are signed, funds are transferred and the property deeded in the buyer’s name.
The second type of escrow in mortgage loans is an account maintained by the lender for the prepayment of taxes and insurance by the homeowner. These are usually monthly payments of 1/12th the annual amount of taxes and insurance. The lender then pays these bills when they become due. These escrow accounts assure the lender that the taxes will be paid and the investment insured against lo

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