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Selling a House

Escrow Fees Explained

If you're buying or selling a home, you're probably wondering about all those extra costs associated with closing. Specifically escrow fees can be..

You know that buying or selling a home typically means more than paying just the amount you write on the offer. However, all the other costs and terminology can be convoluted.  One term you need to know is escrow fees. They are a specific portion of the closing costs associated with making the transfer of ownership between the buyer and seller. It’s important to know what they are and who pays them, so that you aren’t surprised at the closing table.

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What is escrow?

Before we talk about the fees, it’s important to note what escrow does for you. When it comes to a real estate transaction,  the escrow process begins when the buyer and seller go under contract on a piece of property. Typically, the buyer puts down an earnest money deposit with the accepted contract, which is held in escrow.  Really, this means the deposit is held by an impartial third party until both parties uphold their part of the deal (or, they disburse the money to the correct party if the deal falls through, but that’s a topic for later).  On top of holding the funds, an escrow agent, for a fee, coordinates documents between the parties and works to make sure both parties have met the requirements to close.

Why do you need it?

Like your parents always said, it’s for your own good.  Escrow protects both the buying and selling party, as well as the lender, because they’ve merely just met each other.  The seller still needs to prove a clear title and good condition of the property and the buyer still needs to provide proof of funds, making it too early to start handing over the money.  With the impartial third party, the buyer can safely deposit their earnest money while doing their due diligence, the seller can feel confident knowing the buyer won’t back out without losing their deposit, and the lender knows they are working on a supported deal.  Once all the terms have been met, the escrow agent can properly disburse all the funds and make sure everything is in order.

Escrow is opened once all contract paperwork is provided. What to expect from the escrow agent:

  • Oversee that all contract contingencies are met
  • May order title search
  • Creates closing statements
  • Disburses funds
  • Final recording of documents with your local government entity
  • Assists with document signing

What amount in escrow fees will you have to pay?

The escrow fees or charges, like the overall closing costs, are going to be different based on your location and property.  However, you can typically expect anywhere between 1-2% of the home’s purchase price. The party responsible for paying these fees can also vary.   In some states, buyer and seller parties split the fees, but like everything in the transaction, the terms are negotiable. Be sure to read your contract and ask your real estate agent if you’re not sure which fees you are agreeing to pay.  These fees may be paid to an attorney, a title company, or escrow agent depending on who renders your services.

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Other types of escrow

If you are purchasing a property with the help of a lender,  it’s likely that they may also force you to make a deposit at closing into an escrow account.  This is different than the escrow where your earnest money is being held. The lender will require a monthly payment into an escrow account that they hold for the length of your loan to pay property taxes and hazard insurance. This ensures that the mortgage company has full control over the protection of your property.

In the end, escrow is important

It may be another fee you have to pay when buying or selling a home,  but escrow really is an important part of protecting the interests of all involved.  You likely wouldn’t trust a stranger on the street with a stack of cash, so you probably  don’t want to trust them with one of your biggest investments, your house, either. Important things you can do are to choose an escrow agent carefully, review all your documents in detail, and enlist the help of a top real estate agent to guide you through the whole process.

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