If you are in the process of buying a home or starting your home buying journey there is a high chance that you have come across the word: escrow. Despite being a very common part of the home buying process many Trinibagonians don’t know what escrow is and how it works.
So, let’s look into it…
What is an Escrow?
An escrow is a legal arrangement whereby money or in some cases an asset is temporarily held by a third party, separate from the buyer and seller, in the process of completing a transaction.
Who is the third-party involved?
In Trinidad and Tobago, it is, most often the mortgage lender/servicer. However, the most common third parties that hold the money in Escrow when purchasing a property are an Attorney or the Real Estate Broker.
Why is it part of the home buying process?
An escrow is used to protect both the buyer and the seller in the home buying process. However, it is issued for two main reasons. Firstly, it protects the buyer’s initial deposit and ensures it goes directly to the right party. Secondly, it is also used to hold funds for certain expenses. In this case, the third-party, will create an escrow account and keep it throughout the term of the mortgage for taxes and insurance expenses.
What is the difference between Escrow Accounts for Home Buying and escrow accounts for taxes and insurance?
Escrow Accounts for home buying refer to your earnest money, which is the money you pay before closing on a house. It is also known as a good faith deposit and it shows the seller that you are serious about purchasing the home.
The escrow account is set up to hold the deposit and it will sit in the account until the transaction closes. When the purchase is finalised the cash is then applied to the downpayment.
This is meant to ensure that the money is released to the right party at the right moment once all the conditions of the sale are met.
Escrow Accounts for Taxes and Insurance occur after the purchase of a home. The buyer's lender will create an escrow account after closing a house. Thereafter, the mortgage lender takes a portion of each monthly mortgage payment and holds it in the escrow account for the buyer's tax and insurance payments. The lender will also pay these bills for you and keep tabs on any fluctuations on these expenses. The lender will calculate a buyer's escrow payments for the next year and ensure that there is 2 months' worth of extra payments held in the account. There is no set price for this as it varies depending on the house and property size. These rates are also subject to change but all lenders will send you an annual review or report to keep you up-to-date with your payments and any changes in the market. In Trinidad and Tobago however, escrow relates more to the first option than the latter.
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