There are so many different things to consider when purchasing a home, which is why many people will tell you that it will be the most stressful time in your life. But, once you’re all moved in, you’ll feel much better!
There are so many costs and fees to think about that your head is probably spinning at this point. One of the biggest questions we get asked is about escrow fees. What are they? How much are they and who pays it?
That’s what we’re here to make clearer for you.
Escrow fees are a part of the process of buying a home. When you are closing on your new home, escrow fees will be part of the costs, and paid to the title company or directly to an escrow company.
During a real estate transaction, escrow is used to hold the buyer’s money or good faith deposit, to show that they are serious about purchasing the property.
Once the purchase is complete, escrow can be used to hold a part of the owner’s monthly mortgage payments, and is put towards taxes and homeowners insurance.
Most escrow accounts are there to cover the cost of paperwork such as the recording of the deed, the exchange of funds, real estate fees, loan fees, seller’s profits, third party payments and many more.
By having an escrow account in place, you can keep your earnest money safe throughout the whole closing process.
Your earnest money is what you put down on a house before closing to show that you are very serious about purchasing the property. It’s a deposit that holds the property for you.
Earnest money therefore protects the seller if the buyer backs out, but can be returned to the buyer if they need to back out of the sale before a certain deadline. Earnest money is usually around 1% to 3% of the sale price and is held in escrow until the sale is final.
Once the sale is final, you can have the money released from the escrow account, and used towards your down payment, and mortgage costs.
After closing on a house, another escrow account will typically be opened by the mortgage company or lender, for the purpose of paying property taxes and homeowners insurance on time.
To be ‘in escrow’ simply means that you are in the process of purchasing a new home. If your good faith deposit is in an escrow account, then you are in escrow.
This period typically lasts from when you make your offer, with a cash deposit, to when it is accepted by the seller or real estate agent, and to the day that you close on the house and have complete ownership. The whole process typically lasts about a month.
In many cases, an escrow account will be set up for you by the real estate agent that is dealing with the purchase of your home.
If you are buying a home privately, then an escrow account can be set up by an escrow agent, the bank or title insurance companies.
Once you have closed on a house, you will have escrow fees for the closing process. These fees are generally calculated depending on the state you live in, and the value of your home. You will most likely pay a percentage of your home’s overall price.
For instance, your escrow fees could be 1% of the total value of your house, so if your home is $300,000, then the escrow fee for the purchase would be about $3,000.
This will either be paid to the real estate attorney, title company or escrow company after the funds have been distributed during the closing of the sale.
In addition, you will have to prepay some escrow costs for your new account opened by your mortgage lender. The lender may make you pay upfront for your homeowners insurance for the first year, or you will have to pay for initial coverage.
Then, you will need to pay for your second year of coverage as part of your monthly mortgage payments.
You will also need to pay for property taxes, which will be calculated by the value of your property. Some lenders will require you to pay 3 months of property taxes up front, which you will pay into your new escrow account.
Generally speaking, the cost is typically split between the seller and buyer, however this can be negotiated so that one party pays it all.
There are no real regulations as to who has to pay the escrow fees, so this will need to be negotiated by the real estate agent.
It is best if you speak about it with the seller of the home, or your real estate agent, so that both parties are able to work out who is going to be responsible for paying, or if both will.
You are within your legal rights as the seller or buyer to ask the other party to help cover these costs.
For the most part, yes. You can expect to pay one twelfth of the total of your annual property taxes and home insurance every month to keep your escrow account properly funded.
However, how much you pay depends on the amount you normally pay for your property taxes and homeowners insurance each year.
To summarize, escrow payments and fees can be a little overwhelming when purchasing a house. These fees are calculated based on the property’s worth, your location and the escrow provider or real estate agents.
Make sure that you have a conversation with your real estate agent throughout the closing process to give you an in depth understanding of what you are expected to pay.