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Types of escrow in real estate

In real estate transactions there are typically several kinds of escrow accounts. Explore some of th different escrow real estate accounts in this video.

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Video transcript

- [Voiceover] The term escrow. That E looked funny. The term escrow is used a lot in real estate. It's actually used in a lot of just financial transactions in general, but real estate is the place that most of us will see it most frequently. And even in the context of residential real estate, it tends to be use in two different ways which can only make it more confusing. Now one way in which he word escrow is use is when you're actually buying the house. So what happens is, you make an offer on the house. Let's say that the seller accepts the offer, then you have an opening of escrow. And what an escrow is, it's a third party account, so it's managed by a trusted third party. So this right over here is escrow, escrow, and it's managed by a trusted, a trusted third party. And what happen is, is that the buyer, we'll do the buyer in another color. The buyer places all of their obligations into escrow, so it might be the deposit that was part of the offer contract. It could be the actual, the remainder of the down payment, usually the deposit goes towards the down payment. It could be, it could be getting the financing, so let's, this is the down payment, the down payment and the deposit. It could be getting, actually securing the financing which would mean the remainder of the house. And the seller fulfills all of their obligations. So, this right over here is the seller, and they allow the house to be inspected, and let's say that the house passes inspection, passes inspection. Let's say that the title company is able to do a title search, and it's a clear title. Clear title, clear title. So then on the closing day, and that day is actually the closing of escrow, so you go to the closing day, so closing, on the closing day. This third party says, "Okay, everybody has met "their obligations, I'm going to give the seller "the money, I'm going to give the seller the money, "and I'm going to give the buyer, "I'm going to give the buyer the house." Or we could say the title, the title to the house. And we go into a lot more of depth into this in other videos. So this is one form of escrow. It's the third party where all of the the things from either party are put into place so that you could have closing, and then actually, and actually transact the house and the money and the house actually changes hands. Now the other way that the word escrow is use in residential real estate, it's a related idea, it still involves having a trusted third party. And that's what this term generally means, is using a trusted third party, having a trusted third party account where the different parties to a transaction they can use it, so that they can facilitate the transaction itself. So the other place you might see this is actually when you are making your mortgage payments. So when we typically talk about mortgage payments, let's say that your monthly mortgage is, let's just say for the sake of simplicity it's a $1000, it's $1000. So this is your mortgage payment, $1000. And let's say your very first mortgage payment is going to have, some amount of it is going to be paying for interest. So when you start paying it's only going to be mainly interest. And some of it is to pay down principle, principle. And then we've seen this a lot of time, the next payment of a $1000 if you have a fix mortgage. So the next payment of $1000, more of it is going to be principle, and less of it is going to be interest. But when you actually write your check to the bank you might find out that you're paying more than a thousand dollars. And you say, "Why am I paying more than a $1000?" And if you call your bank and you would ask them that, they'll say "Okay, well you know what, "If you're not able to pay this mortgage "this house comes to us, "and we want to make sure that this house "is properly insured, and we want to make sure "that the taxes are paid on it." Why do they care that the house is insured? Well, if the house isn't insured, and there's a hurricane or a tornado and it destroys the house, then you might want to walk away from that mortgage and all the bank is going to be left with is a house that was destroyed by a hurricane or a tornado. So they want it to be insured, and they also want the taxes to be paid, because once again if there's a bunch of back taxes you might just want to walk away from the house, and then the bank is going to be left paying those back taxes. And so what the bank might do is say, "Okay, you know what? "You, your house--" And I'm just going to fix the numbers so that they work out well. "For your house, you have to pay 1200, 1200 "a year in insurance, and you have to pay, "and you have to pay 1200 a year, 1200 a year "in property taxes, in taxes." So that comes to a total of 2400 a year, whoops, that comes to a total of 2400, 2400 a year. And so, and we could write this for, this is for taxes and insurance, and sometimes they'll even short handed T and I. So there's a $2400 of tax and insurance, the way that we're going to make sure that you pay it, is that every month you're going to pay one twelfth of this. So you're going to pay $200, so every month you're going to pay $200 for taxes and insurance and this is going to go into an escrow account. So that $200 every month goes into an escrow account for taxes and insurance. It goes to an escrow account. And then the escrow, the escrow account in this situation, whoever is managing it, well every time that they get a bill for the taxes or insurance, they will pay it out of the escrow account. And so once again, it's kind of a safe third party account for a stated purpose, and then in this case the stated purpose is to pay the insurance and taxes to you want that to go into the account, to make sure that the bank just doesn't pocket it, and the bank wants to go to that account so make sure that there's money around to pay for the insurance and taxes. So these are the two primary ways that you might encounter the term escrow. They both are representing the same idea of kind of putting money into an account that can be used for a stated purpose, but they are usually using two different contacts here, this is to facilitate the closing of a house, and literally the closing of escrow the transaction of the house. This is to make sure that other cost are being paid.