Escrow costs are often misunderstood by homebuyers. They are fees charged by the escrow holder who completes the transaction on behalf of the buyer and seller. Escrow accounts hold money on behalf of both parties until the conditions of sale are met. Escrow calculators can help buyers estimate fees. Escrow costs are part of closing costs, which include all fees incurred for the completion of a real estate transaction.
While buying a home seems like a simple process, the transaction can be very confusing for homebuyers. One of the most commonly misconstrued costs associated with closing a real estate transaction is escrow costs. Escrow costs are fees charged by the escrow holder who completes the transaction on behalf of the buyer and seller. Like any other business, escrow holders must be paid for the services they provide and make a profit. Escrow costs are generally paid by the buyer at closing and typically include fees for setting up the account, holding the sales documents, and closing the escrow account. Fees for these services vary between escrow companies and from area to area.
In general, “escrow” refers to the holding of money by a third party on behalf of the other two parties directly involved in the transaction. In real estate, money to buy a property is often held in an escrow account while the home is inspected or other conditions of sale are met. The buyer deposits money into the escrow account to show the seller that he is able to make the payment. Then, once the conditions of sale are met, the collateral holder transfers the payment to the seller of the property. If the conditions of sale are not met, the money returns to the buyer. In this way, escrow accounts serve as protection for both the buyer and the seller.
Typically, the escrow holder will provide all parties with a minimum fee schedule, which allows for additional fees depending on the terms of the transaction. Sometimes additional fees will be incurred, depending on the circumstances of the transaction. The escrow agent should be able to provide homebuyers with an estimate of escrow costs, as well as fees charged by other parties, such as lenders and title insurance companies. Escrow calculators are also available online so buyers can estimate fees so they can budget ahead of time.
Escrow costs are commonly confused with closing costs because most of these fees are paid when the transaction is completed or closed. However, closing costs generally include all fees incurred for the completion of a real estate transaction. In general, closing costs on a home are approximately two to four percent of the purchase price. Closing costs include escrow costs, as well as fees for legal services, inspections, loans, title insurance, and taxes.
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