Introduction to Mortgage Escrow Accounts

Real Estate involves some complicated terminologies. A lay man can easily get lost in the midst of these terminologies. One such term is escrow. In simple terms, this is an account that is held with a third party in order to complete mortgage payments for a property. Escrow has become mandatory in some parts of the country as a surety for people to pay for their houses.

In terms of functioning, escrow operates as a savings account, the proceeds of which go to the annual mortgage of your property. Escrow allows you to make small installments towards payment of your mortgage. This can be a big relief for an average income family. This is analogous to a savings account for your home, where you pour in money every month instead of making one massive payment at the end of the year.

Sometimes, escrows can even act as your insurer and as the title company that holds the papers for you until the payment is made.

Merits and Demerits of Escrow Service

An escrow mainly provides a sort of safety net for everyone involved. At the same time, it makes payment a whole lot easier for the buyer. The main disadvantage of using an escrow service is that the money in your account does not earn you an interest. Suppose you have an annual mortgage of 20,000 dollars on your house. This amount in any other account would have earned you a dividend in the tune of 7 -8%. However, in an escrow, there are no gains on this capital. Some services may provide minimal interests, but these are rare.

Frequently people question whether they can buy a property without having an escrow account. It is possible, and by no means illegal. You can even save thousands of dollars in doing the minor paper work yourself. However, there is always the risk of losing the house due to nonpayment of tax bills and mortgages.