What It Means to Be 'In Escrow'

By Robert J. Bruss
Saturday, August 11, 2007

Q: DEAR BOB: I used to live in California, where the word "escrow" referred to the closing of a real estate sale. For example, we said, "We're in escrow for the sale of our house." But then I moved to Florida, where the term seems to have an entirely different meaning. Here, it refers to the mortgage lender requiring the borrower to deposit a stated amount each month into an account for payment of the property taxes and insurance bills when they come due. Which is the correct use of the word? -- Myron A.

A: DEAR MYRON: As you discovered, there are at least two real estate meanings for the term "escrow." The word refers to putting something of value, usually money, into the care of a third party. Escrow companies operate in many states. Sometimes there are also title or abstract companies that arrange for owner's and lender's title insurance policies.

The primary purpose of an escrow for a real estate title transfer or closing settlement is to have a trusted, neutral stakeholder hold the seller's deed to the property, which will be delivered to the buyer upon payment of the sales price and fulfillment of other sale conditions. The second meaning refers to the mortgage lender requiring the borrower to pay each month 1/12th of the annual estimated property taxes and hazard insurance into an account maintained by the lender. When the property tax and insurance bills for the property become due, the lender pays them from these funds.

Meanwhile, the lender gets the use of the escrow funds, thus earning itself a modest amount of extra income. A few states have laws requiring lenders to pay borrowers interest on escrow funds, typically about 2 percent. These escrow accounts are required for Veterans Affairs, Federal Housing Administration and PMI (private mortgage insurance) home loans. Because lenders tend to overcharge on these escrow accounts, making annual adjustments to refund any overcharge, borrowers often dislike them and try to avoid them whenever possible.

DEAR BOB: We own a condo in a resort area, and we have been trying to sell for more than a year. Our real estate agent agreed to a 7 percent sales commission, with 4 percent going to the buyer's agent. We are also offering $10,000 to the buyer at settlement. The unit is priced at $135,000, which is the lowest in the community. Everyone agrees that it shows well, with new paint and carpet. There has been a steady stream of showings, but we have had no offers. Because we didn't pay much for this condo, we are considering contacting the "We Buy Houses" people to get their offer. The property is debt-free, but we pay property taxes and substantial condo fees. What do you know about these companies, and how can we avoid being swindled? -- Marty D.

DEAR MARTY: The "We Buy Houses" companies you see advertising in newspapers and on billboards want to earn a big profit. As a result, they will offer a price substantially below the fair market value of your condo.

If your condo hasn't sold in more than a year, something is seriously wrong. Chances are, your condo is overpriced. Having the lowest price listed in your condo complex is irrelevant. What is the latest sales price for a similar nearby condo? Your asking price should be at or below that amount if you want to sell. Slash your asking price.

Because you own your condo free and clear, have you thought about carrying back an installment-sale mortgage for the buyer? With a 10 to 20 percent down payment, such a mortgage would be a good investment, earning about 6 percent interest. Advertising "easy seller financing" is sure to create buyer interest.

Also, if your listing agent couldn't sell your condo in a year, maybe it's time to get a new agent.

DEAR BOB: I have been reading in your columns and elsewhere about reverse mortgages. I am retired and younger than 62. My wife is older than 62. Can we qualify for a reverse mortgage? -- Ronald B.

DEAR RONALD: To obtain a reverse mortgage, all principal-residence co-owners must be at least 62. You could quitclaim your title to your wife, but then you wouldn't hold any ownership interest in the home. The reason for this rule is that the life expectancy of a co-owner under 62 is too long. Reverse mortgages provide your choice of a lump sum, lifetime monthly income, credit line or any combination.

DEAR BOB: The loan specialist for the mortgage lender that financed my recent condo purchase said I would receive 100 percent financing with no private mortgage insurance premiums. While reading the numerous documents I signed at the closing settlement, I noted that one says the lender will pay the first year's PMI. After I made the first loan payment, the lender sold my mortgage to another lender. The new lender describes my mortgage as one with PMI. Does this mean I have to start paying PMI after 12 months? Was I misled by the loan officer? Do I have any recourse? Is this another case of lender abuse? -- Robert M.

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