Escrow Fees: What They Are, Typical Costs, and Who Pays

As homebuyers prepare for closing, it’s important to understand what costs they’re expected to pay before the transaction closes. Escrow fees are just one of many closing costs homebuyers may encounter. They help coordinate the transfer of funds, documents, and property ownership.

Knowing how escrow fees work, what they usually cost, and who pays them can help you budget more effectively and avoid surprises at closing.

What Are Escrow Fees?

Escrow fees are a portion of the closing costs you’ll owe when you buy a home. These funds are held in an escrow account, typically established by your title company, and cover the costs of preparing documentation, recording the deed, and distributing funds to appropriate parties.

Escrow accounts improve security for both buyers and lenders before the transaction is complete; they keep your money safe and allow your lender to fund new homeowning expenses. Depending on the provider you and your lender work with and the state the transaction takes place in, your escrow fees will generally account for roughly 1%-2% of your home’s price.

Although escrow fees can vary, there may be a few charges that are more common than others.

Types of Escrow Fees

Here are some types of escrow fees:

• Escrow or settlement fee: Usually a one-time fee paid to the third-party settlement company who manages your funds during the transaction.
• Wire transfer and courier fees: Accounts for the electronic payments and physical delivery of documents to various parties involved in the transaction.
• Notary fee: Some legal documents may need to be notarized before the transaction can be finalized, which may result in an additional fee.
• Document preparation and admin fees: Covers costs of preparing, reviewing, and processing the paperwork involved in the transaction.
• Recording fee: When you buy a home, the deed and other important documents need to be recorded by state and local government agencies to be made a public record.
• Title-related escrow charges: These cover any fees associated with the property’s title search, title examinations, and title insurance to verify the property’s ownership history.

These are just some of the most common escrow fees you might find, but they may differ based on the circumstances of your transaction. Depending on the provider, your escrow fees could be calculated differently.

How Much Are Escrow Fees?

Escrow fees are typically fixed or a mixture of fixed fees and ones based on a percentage of the loan amount or home value.

Escrow fees like the ones mentioned above are typically fixed fees. These can vary widely by state and provider.

Title and settlement fees are commonly based on loan amount and often start at a base/minimum fee plus a percentage of the loan.

Whether fixed or based on home value, you can expect to pay approximately .5%-2% in fees. So, for example, if you find a home with a purchase price of $400,000, you might expect to pay between $2,000 and $8,000 in escrow fees. Work with your lender and real estate agent and shop around when you can, to find the provider that best fits your needs and budget.

Who Pays Escrow Fees?

There’s no single arrangement that’s more favorable than another, and the details of the agreement can usually be negotiated as part of the purchase agreement. Local customs, lender requirements, and current housing market conditions are all considered when discussing who will pay escrow fees in a home sale.

Generally, buyers and sellers opt for one of three options. Both parties can split these expenses 50/50. Alternatively, buyers could be responsible for 100% of the escrow fees, or sellers could be responsible for 100% of the escrow fees.

Determining who pays these fees depends on your agreement with the seller, so explore all of your options to find one that best suits your situation and goals.

Escrow Fees vs. Escrow Costs

“Escrow costs” and “escrow fees” are often mistaken for one another, but they refer to two separate expenses and processes. Escrow fees are usually one-time fees paid at closing to cover the services provided to facilitate the home sale.

Escrow Fees:

• One-time fee paid at closing
• Used to pay for the transfer of funds, title, and administrative tasks associated with finalizing the transaction
• Incurred while buying a home, not while owning one
• May be charged as a percentage or as a flat fee
• Can be paid by you, the seller, or both

Escrow costs, on the other hand, are ongoing expenses paid monthly into your mortgage escrow account to pay for property taxes and homeowners insurance. By putting these funds in an escrow account after you’ve closed, your lender can be sure important homeownership obligations (like insurance premiums) are paid on time.

Escrow costs:

• Collected monthly from your mortgage payment
• Ongoing expense that begins after closing
• Used to pay property taxes and insurance premiums
• Can increase or decrease over time
• Need to be paid by you (the homebuyer)
• There are no administrative fees for escrow costs

If you want a more detailed breakdown of these charges, you can find them in section E on page 2 of your Loan Estimate or section E on page 2 of your Closing Disclosure.

Escrow Fees and Costs FAQs

Here are some additional questions you might have on escrow fees.

Why Are Escrow Costs So Expensive?

Escrow costs can feel expensive because the account is tied to homeowning expenses that can rise over time. Even if you have a fixed-rate mortgage, increases in taxes and insurance can cause your escrow payments to rise, which means your monthly housing costs rise.

What Services Do Escrow Fees Cover?

These fees primarily compensate the services provided by third-party escrow or title agencies. The distribution of funds, management, and filing of critical documents are included in these fees. The escrow account also safeguards your money and increases security for both lenders and buyers during a transaction.

Can Escrow Fees Be Negotiated?

Generally, yes. In many cases, escrow fees and the party (or parties) responsible for paying them are determined by negotiations between the buyer and seller and may be influenced by local market practices.

Will My Escrow Costs Increase?

Escrow costs will typically rise over time. In an escrow analysis, lenders like Freedom Mortgage will conduct an annual evaluation of your escrow balance to ensure enough funds are included with monthly payments to pay your property taxes and homeowners insurance premiums. As these expenses increase, your monthly escrow payment will increase.

Are Earnest Money Deposits Considered Escrow Fees?

No, earnest money deposits are not the same as escrow fees. If a buyer is interested in a home, they may submit an earnest money deposit to ensure their offer is accepted. These funds are held in an escrow account until closing, despite them not being considered actual “fees.”

Final Thoughts: Understand Your Escrow Fees Before Closing

Escrow fees are an important part of many real estate transactions because they help facilitate a secure transfer of funds, documents, and ownership of property. These fees can greatly vary depending on negotiations with the seller, your lender, the value of your home, and its location. They can be charged as a percentage of your home’s value or as a flat fee.

Before you close, read through your loan documents carefully so you understand all the fees associated with your transaction. If you’re thinking of buying a home, or just want to see how much you qualify for, get prequalified online today.