An escrow account is essentially a holding tank. During a real estate transaction, the escrow officer—usually a lawyer or title company representative—holds all the important documents and deposits while the buyer and seller work out the details.
The escrow officer makes sure the closing goes smoothly and everyone gets paid what they’re owed (including, of course, the escrow officer himself, who typically gets a fee of 1% to 2% of the cost of the home). After the closing, the escrow agent records the deed and title transfer that make the home officially yours.
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Most transactions involve a second type of escrow account, between you and your lender. Many mortgage lenders hold money in escrow to pay property taxes and insurance. Each month, you pay a portion of the estimated annual costs along with your principal and interest.
At the end of the year, the lender adjusts your monthly escrow amount based on the actual tax and insurance bills. If you were short, you’ll generally be allowed to spread the difference out over the coming year. If you paid in too much, the lender will refund your money.