Sander Scott, a realtor, explains escrow in real estate: earnest money held by a third party during a sale, and mortgage escrow that covers taxes and insurance. He covers how lenders budget these costs and adjust annually, plus escrow's role in 1031 exchanges.
Hey there, Sander Scott, full-service realtor here, coming to you with questions answered about real estate. And I'm often asked, what does escrow mean in real estate? Well, there are two main things that an escrow relates to, but what escrow means is to hold. So escrow, basically you have a third party holding funds for the benefit of others. The two main instances are in the case of an earnest money deposit that is held in escrow by a third party in a non-interest-bearing account. So nobody's making money off your money, and it's just a service that title companies provide to hold that earnest money deposit. If you have questions about what exactly an earnest money deposit is, I've got a video on that. That's another reason— whoa, icy trail here— that's another reason to subscribe to my channel. So the second thing that escrow is most related to is— wow, kind of hurt my elbow there— is when you are— when you actually own the home And it's often a discussion that's had at closing. Do you want to escrow, have the mortgage company, if you're using a mortgage, have your taxes and insurance escrowed? And so what that means is rather than getting the year-end bill for insurance and taxes, or twice a year in the case of taxes, rather than getting that bill which is in one lump sum. You can put yourself basically on a budget plan, and this is a service that the mortgage company provides, and you're paying a little bit a month, and then at the end of the year, the mortgage company is required to true up. In other words, they may have collected a little too much from you, and in that case you'll get a check to true up at the end of the year, or they may have collected a little bit under what they needed to, and so you've got to make up the difference to get your escrow balance at the year's end set to zero to start over again. So, um, you know, from a budgetary perspective, first-time homebuyers, I always recommend that they, uh, they get their that they use the escrow feature that their mortgage company provides to get themselves on a budget plan when it comes to taxes and homeowners insurance. So escrow is used in other ways, you know, for someone that's using a 1031 exchange in the case of investment property, you use an escrow on that as well. But basically, again, escrow means to hold. A third party is holding that money for a variety of different purposes. And there you go, that's what escrow in real estate is all about. If you have more detailed questions about escrow, leave them in the comments. Again, any question that you want answered in real estate just leave it in the comments or shoot me an email, um, and I'll get her answered. So thanks a lot, and we'll see you soon.
