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Escrow is one of those words in real estate that has different meanings. Some people refer to the closing of the real estate transaction as "the close of escrow". An escrow account can also be an account with the title company where they hold the earnest money or deposit on the transaction.
Generally speaking, an escrow account is an account that is held by somebody for the benefit of another. When the title company holds your earnest money in it's "escrow" account, they own the account, but the money that is in the account is being held for your and the seller's benefit.
Another type of escrow account are the ones that your lender holds for you. When you close on your real estate transaction you will have already purchased the home owner's insurance for the first year that you are going to own the property.
Each month when you make your payment, 1/12th of the premium for the following year will be deposited into your "escrow" account from your payment so that next year, when the premium comes due, the lender has the funds to go ahead and pay it.
Your tax escrow works much the same way. The seller will credit you for the portion of the tax year that they owned the house and you in turn will be charged this number of months worth of taxes to be placed into your tax escrow account. Each month from that point forward you will deposit 1/12th of the yearly tax bill into your tax escrow account so that when it comes due, the lender will have the funds to pay them. Here in St. Louis county are taxes are due on December 1st of each year.
You can also have escrow accounts for other items such as Private Mortgage Insurance.
Lenders are regulated in how much they can require to be in the escrow accounts at any given time and are also required to do a yearly examination of your escrow account to make sure that they don't have too much money in there (basically an interest free loan that you are making to the financial institution). The formula that they use is kind of complicated, but basically they can have the amount needed to meet the demands of the account plus about two months worth of each of the items being escrowed.
When you sell your house some lenders will credit the amount of money in your escrow account towards your principal balance and others will mail you a refund check at some point after they have received their payoff on your mortgage. They are required by law to issue these refunds within 30 days of receipt of the payoff.
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