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How Does An Escrow Account Work?
If you’re in the process of getting a mortgage to buy a house, you will hear the term escrow quite a few times.
An escrow is a legal arrangement. In this arrangement, a third party holds money or property until a certain condition is met. When we’re talking about a mortgage, this could be fulfilling your purchase agreement.
Within real estate, in particular, escrow protects buyers and sellers in the transaction. With the mortgage, the escrow account also holds the funds for homeowner’s insurance and taxes.
There are two types of escrow accounts in real estate, as mentioned—the first is to protect your good faith deposit. That means the money goes to the right party based on the conditions of your sale. The second is to hold funds that will cover the property taxes and homeowner’s insurance.
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Escrow Accounts for Buying a House
When you buy a house, you’ll sign a purchase agreement. That purchase agreement usually includes earnest money, also known as a good faith deposit. This is meant to show you’re serious about buying the house. You might include a personal check of 1-2% of the purchase price when you make an offer on the house, although it can be more depending on the market.
If your contract falls through and it’s your fault as the buyer, the seller will probably get to keep this money. If your offer is rejected, you get the money back.
If the home purchase goes through, then the deposit gets applied to your down payment as the buyer.
An escrow account is set up to protect a buyer and a seller, and the deposit is held there. Your good faith deposit stays in this escrow account until you close, at which point your cash goes toward your down payment.
The funds might be held in escrow beyond the sale of the home, which is an escrow holdback. An escrow holdback can happen for a number of reasons. For example, maybe when you did your final walkthrough, there was something wrong with the house.
If you buy a new house, the money might stay in the escrow account until you sign off on the work, and then when the conditions are met, the money is released.
Taxes and Insurance
After buying a house, your lender sets up an escrow account from which your insurance and taxes are paid. Once your closing is complete, the mortgage servicer takes part of your monthly mortgage payment, holding it in the escrow account until your insurance and tax payments are due.
The amount needed for escrow changes. Your tax bill and your insurance premiums can change yearly.
Your servicer determines your escrow payments for the upcoming year based on what they paid the previous year. To ensure there’s enough money in escrow, lenders usually require at least two months of additional payments to be held in the account.
Lenders will check an escrow account annually to ensure they aren’t collecting too little or too much. If they determine when analyzing it that they’ve collected too much for your taxes and insurance, they’ll give you an escrow refund.
If they collected too little, you might need to cover the difference.
Who Manages These Accounts?
A third party manages an escrow account. This might include an escrow company or agent or a mortgage servicer.
If you’re buying a house, your escrow will probably be managed by a mortgage service company or maybe an agent. The agent or company may be the same as the title company.
The escrow company will manage the deposit you put down as a buyer, and they might also hold the deed and any other documents that relate to the sale of the home. Since the escrow company works for the buyer and the seller, the fee is often split between the two.
Your mortgage servicer manages your mortgage from when you close until you pay it off. A mortgage servicer is responsible for collecting mortgage payments and maintaining the records of your payments, along with managing the escrow account.
Finally, an escrow account doesn’t cover all homeownership expenses. For example, your lender or mortgage servicing company isn’t going to collect the money to pay your HOA fees or utility bills. There are also supplemental taxes not covered by escrow accounts, and lenders don’t know when you’ll get one of these or how much it will be so account for this. | BidBuddy.com
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Why Are People Buying Houses with Their Friends?
When we think about buying a home, we think about the traditional situations. You might buy a starter home on your own, or you could get married or start a family and then buy a home.
We tend to view homeownership as something we do alone or with a significant other, but there’s a new trend becoming increasingly popular, which is buying a house with your friends.
Millennials are the primary demographic starting mortgages with friends, and they’re often putting off getting married or having kids.
Co-buying houses with friends isn’t necessarily a positive reflection of the state of the housing market, though. Buying a house is increasingly unaffordable, even when it would have been much more attainable a few decades ago.
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Why Co-Buying?
There is undoubtedly a housing crisis going on right now, and there is a significant shortage of inventory which isn’t showing signs of getting resolved any time soon. When people try to buy a home, they’re often priced out or beat out in bidding wars.
Millennials creatively solve the economic hurdles that might otherwise block them from homeownership with co-buying.
According to the National Association of Realtors (NAR), the number of buyers purchasing as unmarried couples has been rising throughout the pandemic. During the pandemic, a lot of people re-evaluated their living situation. Renters wanted more space, so they thought rather than getting a roommate and continuing to rent, why not buy.
Even before the pandemic, millennial homebuyers were in a tough situation. Saving for a down payment is difficult, particularly with student loan debt and rising living costs. Then, as soon as millennials got to that peak point where they’d normally be buying a home in 2020, a boom began that led to a historic inventory crisis.
Home prices have reached record highs, and starter homes were the biggest victim in the shortage of properties.
Alternatives to the Traditional Lifestyle
The millennial generation has cultivated a new normal, including waiting to get married and have kids. Marriage and birth rates continue to decline, and this generation isn’t settling down as early or in the way that previous generations did.
Still, homeownership remains important to millennials.
Buying a home on your own isn’t always possible with a single income, and around 40% of adults who aren’t in a couple make less money than their peers.
The solution?
Teaming up with a friend or a roommate to cut the price of a home by half. You can potentially buy a home even when you have less money saved.
You may also be able to cut costs in other ways if you take on a communal living model where you’re sharing household utilities and other living expenses.
The Logistics
If someone is considering co-buying with friends or roommates, economists say you should have a formal agreement that will outline the terms for various scenarios. These scenarios include buying out someone who wants to leave the situation or ending the arrangement altogether.
There are also downsides to buying with a friend or roommate. For example, if one of you has a lower credit score than the other, that will negatively affect your mortgage rates. Your friend can affect your credit score too. For example, if they fall behind on their payments, you’re going to be financially impacted.
There are a lot of details that you’re going to need to talk to a professional about, like inheritance issues and how shares are divided. You may not be comfortable having these conversations with a friend or someone who isn’t a family member or significant other.
Overall, it’s an interesting approach to homeownership at a time when it could otherwise feel unattainable but co-buying also isn’t without pitfalls. | BidBuddy.com
What’s Really Happening with Mortgage Rates?
Are you feeling a bit unsure about what’s really happening with mortgage rates? That might be because you’ve heard someone say they’re coming down. But then you read somewhere else that they’re up again. And that may leave you scratching your head and wondering what’s true.
The simplest answer is: that what you read or hear will vary based on the time frame they’re looking at. Here’s some information that can help clear up the confusion.
Mortgage Rates Are Volatile by Nature
Mortgage rates don’t move in a straight line. There are too many factors at play for that to happen. Instead, rates bounce around because they’re impacted by things like economic conditions, decisions from the Federal Reserve, and so much more. That means they might be up one day and down the next depending on what’s going on in the economy and the world as a whole.
Take a look at the graph below. It uses data from Mortgage News Daily to show the ebbs and flows in the 30-year fixed mortgage rate since last October:
If you look at the graph, you’ll see a lot of peaks and valleys – some bigger than others. And when you use data like this to explain what’s happening, the story can be different based on which two points in the graph you’re comparing.
For example, if you’re only looking at the beginning of this month through now, you may think mortgage rates are on the way back up. But, if you look at the latest data point and compare it to the peak in October, rates have trended down. So, what’s the right way to look at it?
The Big Picture
Mortgage rates are always going to bounce around. It’s just how they work. So, you shouldn’t focus too much on the small, daily changes. Instead, to really understand the overall trend, zoom out and look at the big picture.
When you look at the highest point (October) compared to where rates are now, you can see they’ve come down compared to last year. And if you’re looking to buy a home, this is big news. Don’t let the little blips distract you. The experts agree, overall, that the larger downward trend could continue this year.
Bottom Line
Connect with a professional if you have any questions about what you’re reading or hearing about the housing market. | BidBuddy.com
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The Smartest Smart Home: Five Things to Buy Now that Will Help Sell your Home
If you’re getting ready to put your home on the market, you’ve undoubtedly heard that it needs to be in the best possible shape to attract legit buyers. But what else can you do to make it stand out? The answer: Turn it into a smart home.
Not only do smart home features make your place seem updated and well-taken-care-of, but they can also make your home sell quicker and fetch you a higher sales price. “According to a 2017 survey conducted by t3 sixty, a brokerage consulting firm for residential real estate, 40 percent of realtors believe smart homes sell faster, regardless of price,” said Cornerstone Home Lending. “This smart home selling potential has increased 33 percent in the past year.”
If you’re ready to invest a few bucks into some Smart Home features, here are the ones that should give you the biggest bang for your buck.
Home security
T3 Sixty research confirms that home security and video “is the fastest growing sector in smart home technology,” said Coldwell Banker in its Smart Home Study. “The T3 Sixty survey shows that 36.4 percent of homebuyers ask most often about smart home security. Video feeds allow homeowners to easily check in on their home, pets and family while traveling or at work. It is also the Smart Home feature that consumers respond to most in marketing.
This exploding segment of the Smart Home market accounted for just under $2.6 billion in sales in 2015, according to Statista, and more than $6.7 billion as of 2017. “It is expected to surpass $20 billion by 2021.”
Smart appliances
“Smart appliances win big in the ROI game, expected to bump the average ROI up 11 percent more than standard appliances,” they said. “In the 2017 Concept Community study conducted by MFE, 18.2 percent of people listed appliances as the smart home feature with the highest ROI.”
Smart lighting
Automated lighting was noted by more than eight percent of participants in the survey as having high ROI when it comes to smart home features. This feature is especially salient when real estate agents point out not just the ease of use of the lighting system, but also the potential savings. Energy.gov says that “LED lights use at least 75% less energy, and last 25 times longer, than incandescent lighting.”
Smart thermostats
This is an easy “entry point” into smart tech for home, and one that can have a great ROI. It is also another item that real estate agents should be pointing out to buyers,” said New York magazine’s Intelligencer. “The core of the smart home is about the service, right? So you can show how it will change and affect your life and how you interact with your house. If I walk into four houses in the same neighborhood, and one has a Nest thermostat and the agent has educated me that it could save 10 to 12 percent in my heating and cooling, that’s going to stick out in my mind. While the other houses maybe I’m going to forget about. The thing with having a smart home is, you have to work with a listing agent that can convey those benefits because if you don’t, it might as well not even be there — it just doesn’t matter.”
According to a Nest study, the company’s smart thermostat saved consumers on average 10% to 12% on heating and 15% on cooling,” said Security Sales and Integration. “Based on typical energy costs, that translates to an average savings of $131 to $145 a year.” | BidBuddy.com
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