Clearing up escrow confusion

When you buy a house, you're going to hear the word "escrow" thrown around often. It's one of those terms that people just accept without really knowing what it is. Then later, there is confusion because they forget that when you purchase a home, usually there are two escrows involved.

First things first. Here is the definition of escrow: a bond, deed, or other document kept in the custody of a third party and taking effect only when a specified condition has been fulfilled. (Oxford Dictionary)

When you make an offer on a house, your agent will have you write an earnest money check, which will be deposited in escrow while you and the seller negotiate the details of the contract. The check is deposited with an impartial third party - an escrow agent, title agent, or closing attorney - who is not involved in the transaction.

They manage all the incoming paperwork and money from buyers, sellers, lenders and agents. In addition, they handle the title search, schedule the closing meeting, disburse the funds and send the paperwork to the county. When all of this is completed, escrow closes.

You'll receive a statement of escrow closing. Make sure to look this over carefully. If you spot any discrepancies, report them to the closing agent immediately. This statement should be kept with your most important financial records. You’ll need it when you file taxes, too.

Your second escrow

You'll also have escrow for taxes and insurance, which can be abbreviated as "T&Is." Your mortgage lender may require you to begin funding this escrow account by making a payment into the account at closing. They may ask for the total of the first year's estimated T&Is upfront or they may add it to your monthly payment.

No matter how payment is arranged, the escrow is revisited every 12 months. If you overpaid, you may get an escrow refund. This is common. Your lender will then recalculate the cost for taxes and insurance and the amount that goes into your escrow fund will change. Because the value of your home will go up and down, you may see a fluctuation in your monthly payment from year to year.