If you’re in the process of buying a home, you may have heard the term “escrow account” come up. In this blog, we’ll explore what escrow accounts are, how they work, and why they’re important.

An escrow account is a special type of account that is typically established by your lender and/or a title and escrow company such as Sapphire Title & Escrow Company during your real estate transaction. There are two types of escrow accounts. Those for home buying which hold funds such as earnest money, down payment, and closing costs, and those for taxes and insurance, which are funded by a portion of a homeowner’s mortgage with monies set aside to cover annual charges such as homeowner’s insurance, mortgage insurance (if applicable), and property taxes. We’ll detail those below.

Escrow Accounts for Home Buying
During a real estate transaction, the buyer and seller agree to certain terms and conditions that must be met before the transaction can be completed. Those terms are issued and agreed upon in a purchase agreement. Among other things, the purchase agreement will typically include a requirement for a good faith deposit, also known as earnest money. To protect both the buyer and seller, an escrow account will be set up to hold the deposit until the close of the transaction, where it will then be applied to the down payment and/or refunded to the buyer. An escrow account provides a level of security for both the buyer and the seller. Because the funds are held in a neutral account, neither party is at risk of losing their money if the other party fails to fulfill their obligations.

Escrow Accounts for Taxes And Insurance
When you take out a mortgage loan, your lender may require you to set up an escrow account as a condition of your loan. Doing so helps ensure that your property taxes and insurance premiums will be paid on time, thus protecting the lender’s investment in the property. With an escrow account for taxes and insurance, a portion of your monthly mortgage payment will be deposited into your escrow account for the life of your mortgage loan, and your lender will use the funds in your account to pay your property taxes and insurance premiums when they become due. Property taxes are typically due once or twice a year, and insurance premiums may be due annually or semi-annually. If you were responsible for making these payments on your own, it could be easy to forget a due date or miss a payment, which could result in penalties, fees, or even the loss of your home. It’s important to note that the amount deposited into the escrow account each month may fluctuate over time, depending on changes in your property taxes and insurance premiums. If these costs increase, your monthly payment will increase to cover the additional expenses.

At Sapphire Title & Escrow Company, we understand that buying a home can be a complex process, which is why we’re committed to providing exceptional service and expertise to our clients. Buying or selling? Our staff has a combined 80 years of experience in the industry, and we’re here for you and all of Florida. Contact us today to learn more about our services and how we can help you navigate the home-buying process.