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What is escrow in a home purchase?

On Behalf of | Jan 22, 2025 | Real Estate Law

People who are purchasing a home will often notice that they’re going to have to pay money into an escrow account. This is a financial tool that helps to protect borrowers and lenders by providing a way to ensure specific expenses are paid on time. 

The escrow account holds money that’s designated for specific expenses, such as homeowners insurance or taxes. In some cases, it will cover private mortgage insurance. Instead of a homeowner having to try to save the money to pay those expenses, they put the money into the escrow account through the mortgage lender. The funds are only disbursed when a covered payment is due. 

Why is this important?

Escrow is important because it allows the homeowner to spread the required expenses over the course of 12 months. The borrower and lender have peace of mind knowing that the financial interest of the property is protected because the necessary expenses will be paid on time. This can prevent issues, such as a home being seized because of unpaid taxes. 

Are escrow accounts always required?

An escrow account isn’t always required for a mortgage. They’re more common for individuals who make smaller down payments on a property. If there’s not an escrow account required, it’s up to the homeowner to save money to pay the expenses that would have otherwise been covered by escrow.

The escrow account is only one aspect of a mortgage to think about. Borrowers should ensure they understand the mortgage terms and each financial aspect of homeownership. Working with someone who’s familiar with these matters is critical for anyone seeking a home loan.