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Escrow is a financial agreement in which a third party holds money for two other parties until a transaction is complete or certain conditions are met. Escrow accounts play a role in buying a home and escrow payments are part of monthly mortgage bills. Let's examine both.

Escrow accounts for home buyers

When you are buying a home, an escrow account is often used to hold your earnest money until the sale of the house closes. People typically pay between 1% and 2% of a home's price as "earnest money" which demonstrates they are serious about purchasing the house. You don't pay this earnest money directly to the seller. Instead, the money is placed in an escrow account managed by a third party like a lawyer or title company. The money stays in this account until all the obligations and conditions necessary to the sale have been met and the sale closes. Then the money is transferred to the seller.

Escrow accounts offer advantages to buyers and sellers. Placing earnest money in an escrow account reassures homebuyers they can get their money back if the sale does not happen assuming agreed upon contingencies are not met. And escrow reassures sellers that they will receive the money when the sale closes.

Escrow payments for homeowners

Most homeowners are familiar with escrow payments which are part of their monthly mortgage bill. Lenders collect these escrow payments to make sure that a house's property taxes and insurance policies are paid in full and on time. Only a lender can access escrow funds to pay taxes and insurance premiums.

This has advantages for lenders and borrowers. Mortgage lenders are able to use the funds paid into escrow by the homeowner to ensure that taxes and insurance are paid in a timely manner. Many homeowners may also find it easier to pay smaller monthly amounts toward taxes and insurance throughout the year as opposed to paying a larger amount when taxes and insurance premiums are due.

How the escrow amount is calculated

Lenders use escrow accounts to pay for property taxes and homeowner's insurance as well as flood insurance and private mortgage insurance if required. The cost of a home's property taxes and insurance policies do not always stay the same however. These costs can change from year to year and the amount of money you pay into your escrow can change if your taxes and/or insurance premiums increase. Every year the mortgage lender will conduct an escrow analysis to ensure that there are sufficient funds in the escrow account. Your lender may increase the monthly escrow payment required in the event there is a rise in property taxes or insurance premiums. Your lender may also decrease the monthly escrow payment required in the event taxes and insurance premiums decrease.

How can you see your escrow details?

Your mortgage statement will show the amounts you have paid in escrow, your balance and any changes to your monthly payment. Freedom Mortgage customers can see the details on their paper statements or through their online accounts.

Freedom Mortgage customers can also call our Customer Service representatives at 855-690-5900 with questions about their escrow payments. We will be happy to help!

Are you interested in buying a home and want to learn more about your mortgage options? Then visit our Get Started page or call 877-220-5533 to speak to one of our friendly Loan Advisors.

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