What is Escrow – And How Much Does it Cost?
The home-buying process can feel like a wild ride. And most of that ride can be pretty fun – you’re looking at houses online, touring them in person, and imagining yourself in your new home. What’s not as fun, though? The closing process, with its twists and turns and complicated terms. Closing on a home, especially for first-time buyers, can become a labyrinth of obscure words and processes.
That’s what we’re here for! We believe the role of the real estate agent during this time encompasses many things, and one big one is to guide you through the closing. Whenever parties are exchanging big chunks of money, complication ensues. And that complication is there for a reason: to protect both parties in one of the biggest financial transactions in a lifetime.
That’s where escrow comes in. We hear the term “escrow” all the time, but what does it actually entail? Why does escrow become a crucial part of the closing? What does it require of both buyer and seller? Let’s decode it.
What Is Escrow?
As Maria von Trapp says, let’s start at the very beginning. Escrow, in its most basic sense, entails a neutral third party holding some money (called earnest money) from the buyer until the closing process concludes. You can think of it as a miniature down payment. The buyer gives some money to the third-party company to show they are serious about buying the seller’s property. The third party then holds that money until the sale is complete or refunds the money if the transaction falls apart.
Why Does Escrow Exist?
It’s really pretty simple. Escrow protects both buyer and seller as the transaction details are worked out. The word “neutral” here is key – the neutral third party ensures that no nefarious actions come of the transaction on either side.
For the seller, this means the buyer is putting down “earnest money,” which shows that the buyer is serious about their offer and intends to follow through. If the sale falls through due to the buyer’s fault, then the earnest money goes to the seller. So, buyers out there – make sure you mean it in earnest, which is literally the origin of the term earnest money. You might also hear this referred to as a “good faith deposit.” Now, the buyer and seller may both have ways to back out of the transaction where the buyer gets their earnest money refunded. It all depends on the terms written in the offer.
For the buyer, the escrow process entails allowing time for due diligence. Yes, we’re talking about the home inspection period here. This is the time for the buyer to investigate all the details of the sale and ensure they sign off on them before they sign off on that final paperwork. If the sale goes through, the escrow money is applied to the downpayment and/or closing costs.
When Is Escrow Due, and When Does It End?
If it’s your first time dealing with a real estate transaction, the closest you may have come to the term escrow could be fictional depictions on TV. “I’m in escrow!” But what does being “in escrow” mean?
Escrow funds from the buyer are due shortly after the seller accepts the buyer’s offer, typically within three business days. They stay where they are, in the hands of the third party, until closing. So when you hear folks talking about being “in escrow,” they’re talking about a specific and crucial period often synonymous with “closing.” The rest of the down payment is due at or just before closing.
Escrow during a home purchase differs from a homeowner’s escrow account attached to their mortgage. Many homeowners have escrow accounts to help them stay ahead of property taxes. The service company managing the mortgage account will estimate your taxes and factor them into your monthly payment. Yes, that will mean a higher monthly payment, but you don’t get hit with a huge tax bill in the middle of the year.
Escrow Account Benefits
Escrow accounts come in two major forms when it comes to real estate transactions: the escrow for your deposit or earnest money, and the escrow for your home payments, including taxes and insurance costs. These two escrow accounts have their own unique benefits for the seller, the buyer, and even for your lender.
The first benefit of an escrow account comes into play with the deposit. If you handed your deposit directly to the seller, you could be in for a shock if the sale falls through due to a home inspection problem and they refuse to give you back the deposit. By keeping the deposit in an escrow account, you’re guaranteed to get your money back should this kind of issue arise. This way, homebuyers can rest assured that their deposit will get to the right person on time, even if that “right person” means a refund on their behalf. It also gives the seller peace of mind, as it ensures that the deposit is already paid and in holding, so they’re not stuck with a potential buyer who cannot afford the deposit or spends it in the interim.
Escrow accounts are a huge help for homeowners as well. Trying to keep track of insurance payments and taxes can add another complex layer to the stresses of homeownership. With an escrow account, these costs are handled during your monthly mortgage payments, meaning you can rest easy knowing you won’t get a sudden tax bill. It also comes with the bonus that you won’t lapse on your home insurance protection due to missing a bill, as that is already worked into your escrow.
Finally, one of the people who benefits from an escrow account is your lender. It’s not hard to believe lenders have a vested interest in your home not getting foreclosed or losing significant value. An escrow account makes it less likely for you to lapse on tax payments, making it less likely you’ll end up with a foreclosed home due to a lien on your house. On the other hand, if your homeowner insurance coverage lapses, you could be at risk for a major catastrophe for your home, leading to a significant loss in value. Lenders benefit if neither of these things happens, which is why an escrow account is a substantial benefit for all parties during a home sale.
How Much Is Earnest Money in Portland?
By now you may be wondering exactly how much you’re expected to shell out for (hopefully less mysterious) earnest money. Typically, in the Portland area, earnest money amounts are about 1% of the sale price of the home – and that’s not in addition to the purchase price. You can expect your buyer’s agent to recommend putting down $5,000 earnest money for a $500,000 home. But again, what you put into escrow goes towards your down payment; it is not an extra fee.
How Much Are Title / Escrow Costs Today?
That being said, companies that provide escrow services – often title companies – don’t do this out of the good of their own hearts! They’re providing a much-needed service and deserve to be paid for it. Yes, there will be fees for your escrow, which is different from the earnest money. Typically, the buyer and seller split the fees for the escrow. But no set rule applies to this situation. The two parties may negotiate various closing costs, including the fees associated with setting up an escrow account. The term “closing costs” represents a wide variety of costs that come with the transaction.
We do a lot of work to update annual title / escrow costs reports and include them in detail in a larger closing cost report for home buyers and sellers. Check it out!
See a current, full breakdown of Portland’s buyer’s title and escrow costs here.
Who Oversees Your Escrow?
In Oregon, escrow agents must be licensed by the state. Typically, the title agency that provides title insurance also manages escrow.
Looking for a recommendation? We stand behind Fidelity National Title of Portland. They’re a reputable company with an excellent track record in the Portland area as well as nationally. And their website is a great place to find more information about escrow and its workings. They even provide a Rate Calculator to help you get an idea of what their fees are, from title fees to escrow fees.
Work with an Experienced Real Estate Agent
And remember, an experienced real estate agent will always be your best bet for negotiating the nitty gritty. We’ve been selling homes in the metro for over 20 years now. Whether buying or selling, you want someone on your side to take some of the onus off. Our top 1% buyers agents or top 1% sellers agents are here to guide you through being “in escrow” with ease!November 13, 2023