- [Voiceover] The term escrow.
That E looked funny.
The term escrow is used a lot in real estate.
It's actually used in a lot of
just financial transactions in general,
but real estate is the place that most of us
will see it most frequently.
And even in the context of residential real estate,
it tends to be use in two different ways
which can only make it more confusing.
Now one way in which he word escrow is use
is when you're actually buying the house.
So what happens is, you make an offer on the house.
Let's say that the seller accepts the offer,
then you have an opening of escrow.
And what an escrow is, it's a third party account,
so it's managed by a trusted third party.
So this right over here is escrow, escrow,
and it's managed by a trusted, a trusted third party.
And what happen is, is that the buyer,
we'll do the buyer in another color.
The buyer places all of their obligations into escrow,
so it might be the deposit
that was part of the offer contract.
It could be the actual,
the remainder of the down payment,
usually the deposit goes towards the down payment.
It could be, it could be getting the financing,
so let's, this is the down payment,
the down payment and the deposit.
It could be getting, actually securing the financing
which would mean the remainder of the house.
And the seller fulfills all of their obligations.
So, this right over here is the seller,
and they allow the house to be inspected,
and let's say that the house passes inspection,
passes inspection.
Let's say that the title company is able
to do a title search, and it's a clear title.
Clear title, clear title.
So then on the closing day,
and that day is actually the closing of escrow,
so you go to the closing day,
so closing, on the closing day.
This third party says, "Okay, everybody has met
"their obligations, I'm going to give the seller
"the money, I'm going to give the seller the money,
"and I'm going to give the buyer,
"I'm going to give the buyer the house."
Or we could say the title, the title to the house.
And we go into a lot more of depth into this
in other videos.
So this is one form of escrow.
It's the third party where all of the
the things from either party are put into place
so that you could have closing,
and then actually, and actually transact
the house and the money
and the house actually changes hands.
Now the other way that the word escrow is use
in residential real estate,
it's a related idea, it still involves having
a trusted third party.
And that's what this term generally means,
is using a trusted third party,
having a trusted third party account
where the different parties to a transaction
they can use it, so that they can facilitate
the transaction itself.
So the other place you might see this
is actually when you are making
your mortgage payments.
So when we typically talk about mortgage payments,
let's say that your monthly mortgage is,
let's just say for the sake of simplicity
it's a $1000, it's $1000.
So this is your mortgage payment, $1000.
And let's say your very first mortgage payment
is going to have, some amount of it
is going to be paying for interest.
So when you start paying it's only
going to be mainly interest.
And some of it is to pay down principle, principle.
And then we've seen this a lot of time,
the next payment of a $1000
if you have a fix mortgage.
So the next payment of $1000,
more of it is going to be principle,
and less of it is going to be interest.
But when you actually write your check to the bank
you might find out that you're paying
more than a thousand dollars.
And you say, "Why am I paying more than a $1000?"
And if you call your bank
and you would ask them that,
they'll say "Okay, well you know what,
"If you're not able to pay this mortgage
"this house comes to us,
"and we want to make sure that this house
"is properly insured, and we want to make sure
"that the taxes are paid on it."
Why do they care that the house is insured?
Well, if the house isn't insured,
and there's a hurricane or a tornado
and it destroys the house,
then you might want to walk away
from that mortgage and all the bank
is going to be left with is a house
that was destroyed by a hurricane or a tornado.
So they want it to be insured,
and they also want the taxes to be paid,
because once again if there's a bunch of back taxes
you might just want to walk away from the house,
and then the bank is going to be left
paying those back taxes.
And so what the bank might do is say,
"Okay, you know what?
"You, your house--"
And I'm just going to fix the numbers
so that they work out well.
"For your house, you have to pay 1200, 1200
"a year in insurance, and you have to pay,
"and you have to pay 1200 a year, 1200 a year
"in property taxes, in taxes."
So that comes to a total of 2400 a year,
whoops, that comes to a total of 2400, 2400 a year.
And so, and we could write this for,
this is for taxes and insurance,
and sometimes they'll even short handed T and I.
So there's a $2400 of tax and insurance,
the way that we're going to make sure that you pay it,
is that every month you're going to pay
one twelfth of this.
So you're going to pay $200,
so every month you're going to pay $200
for taxes and insurance
and this is going to go into an escrow account.
So that $200 every month goes into
an escrow account for taxes and insurance.
It goes to an escrow account.
And then the escrow, the escrow account
in this situation, whoever is managing it,
well every time that they get a bill
for the taxes or insurance,
they will pay it out of the escrow account.
And so once again, it's kind of a safe
third party account for a stated purpose,
and then in this case the stated purpose
is to pay the insurance and taxes
to you want that to go into the account,
to make sure that the bank just doesn't pocket it,
and the bank wants to go to that account
so make sure that there's money around
to pay for the insurance and taxes.
So these are the two primary ways
that you might encounter the term escrow.
They both are representing the same idea
of kind of putting money into an account
that can be used for a stated purpose,
but they are usually using two different contacts here,
this is to facilitate the closing of a house,
and literally the closing of escrow
the transaction of the house.
This is to make sure that other cost are being paid.