Aasha Realtors : What Is Escrow Payment

Saturday, December 14, 2013

What Is Escrow Payment

An escrow is:

An arrangement made under contractual provisions between transacting parties, whereby an independent trusted third party receives and disburses money or documents for the transacting parties, with the timing of such disbursement by the third party dependent on the fulfilment of contractually agreed conditions by the transacting parties, or an account established by a broker, under the provisions of license law, for the purpose of holding funds on behalf of the broker's principal or some other person until the consummation or termination of a transaction; or, a trust account held in the borrower's name to pay obligations such as property taxes and insurance premiums.

The word derives from the Old French word escroue, meaning a scrap of paper or a roll of parchment; this indicated the deed that a third party held until a transaction was completed.

Escrow payment is a common term referring, to the portion of a mortgage payment that is designated to pay for real property taxes and hazard insurance. It is an amount "over and above" the principal and interest portion of a mortgage payment. Since the escrow payment is used to pay taxes and insurance, it is referred to as "T&I", while the mortgage payment consisting of principal and interest is called "P&I". The sum total of all elements is then referred to as "PITI", for "Principal, Interest, Tax, and Insurance". Some mortgage companies require customers to maintain an escrow account that pays the property taxes and hazard insurance. Others offer it as an option for customers. Some types of loans, most notably Federal Housing Administration (FHA) loans, require the lender to maintain an escrow account for the life of the loan.

Even with a fixed interest rate, monthly mortgage payments may change over the life of the loan due to changes in property taxes and insurance premiums. The validity of an online escrow company's license can be checked with the regulating authority. Usually this is accessible through their official website, and should always be checked before dealing with an escrow company to ensure it is not a look-alike or fraud.