An escrow account is a financial arrangement where a third party holds funds on behalf of the other parties in a transaction.
In this post, we’ll share some benefits of having an escrow account when buying or selling a home.
1. Protection for real estate transactions
Escrow accounts are a common feature of real estate transactions, providing essential protection for buyers and sellers. The escrow company holds the funds from the sale in a separate account, and they disburse the funds according to the terms of the contract.
2. Timely property tax & homeowners insurance payments
When you agree to purchase a home, you also agree to pay a set amount of money each month for property taxes and homeowners insurance. However, if you do not have an escrow account with your lender, it's easy to forget to make these payments on time.
An escrow account ensures that your property taxes and homeowners insurance are paid on time, every time. As a result, you can avoid costly late fees and keep your coverage up-to-date. In addition, an escrow account can give you peace of mind knowing that your lender is taking care of these important payments for you.
3. Hold funds for property purchase
An escrow account is a holding place for funds that are being held in anticipation of a future event. For example, in the real estate industry, an escrow account may hold funds for the purchase of a property.
The funds are typically held by a third party, such as a title company or attorney, and are only released when the conditions of the sale have been met. This provides buyers with the peace of mind knowing that their funds are secure, and it also allows them to spread out their payments over time.
4. Financial protection
Your homeowners insurance premiums and property tax assessments can fluctuate. For example, if your escrow account is short because of your property tax bill increasing, your servicer may cover the difference temporarily.
This protection ensures that you are never at risk of being unable to meet your financial obligations, even if there are unexpected changes in the amount you owe. As a result, you will always be able to make your mortgage payments on time, even if your circumstances change.
5. Save potential money on your mortgage
One last potential benefit of having an escrow account is that it could lower your mortgage costs. Depending on your mortgage lender, you may get a discount on your interest rate or closing costs simply by having an escrow account.
This is because an escrow account shows lenders you’re financially responsible for meeting your obligations. As a result, lenders may be more willing to offer you favorable terms. Of course, there’s no guarantee that you’ll receive a discount, but it’s worth exploring if you’re looking for ways to save money on your mortgage.
An escrow account can provide a measure of protection for lenders if a borrower stops making mortgage payments. For these reasons, most lenders require borrowers to establish an escrow account when they take out a loan.
However, there may be some circumstances in which you can choose to forgo an escrow account. If you have enough equity in your home and excellent payment history, your lender may waive this requirement. Ultimately, whether you use an escrow account is up to you and your lender.
Is It An Escrow Account Worth It?
As you’ve seen, having an escrow account can be helpful because it ensures that these important bills are paid on time, and it can also help to shield you from sharp increases in your property taxes or insurance premiums.
However, escrow accounts also have some disadvantages. First, you’ll need to keep enough money in the account to cover your upcoming expenses, which can tie up a significant amount of cash.
You sometimes need to pay a fee to maintain the account and you may earn less interest on the money in the account than you would if it were in a savings or investment account.
As a result, whether an escrow account makes sense for you will depend on your personal financial situation.
An escrow account is a valuable tool for homeowners insurance. By setting money aside each month, you can help ensure that they protect your home and belongings in case of an emergency. Plus, having an escrow account, you have peace of mind knowing that you’re prepared for anything.
If you need help finding the best homeowners insurance coverage for the best price, start by speaking to a SimplyIOA agent at 833.872.4467 or get a homeowners insurance quote online now.