You searched and searched for a Basking Ridge home you liked before finding “the one”. After checking out the neighborhood, you submitted an offer. The seller accepted. Both you and the seller signed a sales agreement. Now, you’ve entered escrow. You’ve probably heard that word before. But, do you know what it actually is and how it can protect both the buyer and the lender in a real estate transaction? Does it end when the sale is complete? Read on to find out more.
What is Escrow?
First of all, it signifies the period of time between when the buyer submits their offer and the final closing. Second, it’s an account set up through an independent third party to hold money, documents, and other valuables that pertain to a specific real estate transaction. In New Jersey, an escrow agent or escrow company takes care of this account through final closing.
Earnest Money Deposit
To show the seller good faith, the buyer presents an earnest money deposit. This ranges between several hundred and several thousand, depending on the stipulations of the sales contract. This money protects both parties in case the other doesn’t hold up their end of the agreement. For example, let’s say that a home inspection reveals a plumbing leak. The seller agrees to fix the leak before closing. However, during the final walk-through, the buyer discovers water still leaking from the pipes. The seller won’t get paid until the repair has been made. Also, this money eventually rolls into downpayment for your mortgage loan upon completion of the sale.
On the other hand, an earnest money deposit protects the seller, too. After all, they continue to pay their mortgage and keep up the property while it is off the market. They cannot show the property to other potential buyers while it is in escrow. So, if the buyer cancels without a legitimate reason, the earnest money deposit automatically goes to the seller. While these scenarios are the exception and not the rule, it’s nice to know that there is a little buffer to protect you.
Once escrow closes on the sales portion of the transaction, a mortgage company opens up a completely new escrow account attached to your mortgage loan as the new homeowner. This is where your mortgage payment goes. From this account, your mortgage servicer disperses your loan payment (principal and interest), property taxes, insurance, and any other expenses outlined in your loan agreement.
If your mortgage company collects more than needed throughout the year, you receive a refund check. The bank may then reduce your monthly payment to avoid this in the future. However, if there’s a deficit in your escrow account, you will be sent a bill for the difference and the bank will adjust your monthly payment accordingly. Changes to your insurance premiums, property taxes, and interest rate (for adjustable-rate loans) could create this deficit/overage.
FEATURED BASKING RIDGE HOME FOR SALE
To learn more about this and other Basking Ridge homes for sale and rent, please visit our Featured Listings page here.