In this third and final installation of a three-part series, we will continue to explore some of the terms and phrases that are frequently encountered when buying or selling a home.
An escrow account is an account that your lender will require you to open when taking out a loan. The escrow account is funded by your mortgage payment, a portion of which is put into escrow in order to pay your homeowner’s insurance and property taxes. While you are responsible for obtaining your own insurance, your mortgage lender will make payments toward your insurance on your behalf for as long as you still owe on the home.
You will also put money in escrow before you finalize the purchase of your home. This money is held by what is known as an escrow agent. The escrow agent is a third-party who holds all of the paperwork and the money you have put toward the purchase of the home until all parties are ready to transfer property ownership. The time after which the buyer has made an offer but the property transfer has not been completed is referred to as being “in escrow”. During this period, which typically lasts 30 days or longer, the home is inspected and appraised.
As a part of the process of purchasing the home, it will need to undergo a title search. A title search involves confirming who has ownership rights to the property. Even after conducting a title search, mistakes can be made and it is possible that someone other than the seller can have a claim to the property. Therefore, you will also need to obtain title insurance. Title insurance protects both the buyer and the mortgage company if another individual or organization is able to make a claim on the property.
The term “closing” refers to the one- to two-hour meeting that is held in order to complete all of the necessary paperwork to officially transfer the home to the buyer from the seller. The closing typically involves the buyer, the seller, the real estate agent and a representative from the lender.
Prior to the closing, you will receive a closing disclosure, or CD. This multi-page document contains all of the terms of the loan, including the amount of the purchase, the interest rate, the amount of your monthly payment, your mortgage insurance costs, your monthly escrow amount and the closing costs. You should receive this document about three days prior to closing.
The closing costs associated with the purchase of your home will be due at the end of the sales transaction. These costs typically include fees from the appraisal and home inspection, costs associated with the title search and costs associated with an pest inspections that took place. Generally speaking, you should expect to pay anywhere from 1 to 3 percent of your home’s purchase price toward closing costs. Once all of the paperwork is transferred to the appropriate parties, it is referred to as closing escrow.