[aahome] Why Use Escrow In Real Estate Investing?
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Title: Why Use Escrow In Real Estate Investing?
Author: Joel Teo
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What is escrow? Escrow is when two or more people or parties
enter into a legal agreement that provides for the placement
with a third party for safekeeping certain properties,
instruments, or assets, and the release of these properties,
instruments, or assets is contingent on the performance or
fulfillment of certain conditions or acts. An escrow account is
an account that is specifically set up only to disburse funds
for a specific reason or use. In real estate investing and other
transactions of this type, escrow accounts are normally used to
hold funds that are intended for insurance premiums and real
estate taxes that have been paid in advance and can only be
released for these intended purposes.
In real estate, escrow collections are amounts that have been
collected from the borrower by the loan provider to be put into
escrow for specific expenses. These expenses are hazard
homeowners insurance, property taxes, mortgage insurance, and
any other amounts that are paid on a annual or semi-annual
basis. When money is released from an escrow account for the
intended use, this is called an escrow disbursement.
Using escrow for these types of expenses protects both the
borrower and the lender. The borrower gets peace of mind knowing
that the lender can only access the funds for the intended
purpose. This guarantees that the lender will not take the
monthly payments for these expenses and not apply them towards
the intended use. The lender can rest easy knowing that the
borrower can not remove the funds or spend the money on other
things. Both parties have an assurance that these bills are
being met. The lender may be especially interested in the
insurance payments, because if something happens to the house
and the insurance premiums have not been met, then the lender
stands to loose a lot. If the property taxes are not paid, the
property may be seized for back taxes, costing either the lender
or borrower more money. This is why it is important to use
escrow for monthly payments of this type.
Certain expenses are paid every year or twice a year. Most of
the time borrowers pay one sixth or one twelfth of these
expenses on a monthly basis, and these funds are put into escrow
until the expense comes due. Always beware of anyone who refuses
to put these payments into an escrow account.
Any legitimate real estate investor or lender will be more than
willing to put these amounts into escrow, and if they seem
uncomfortable with this that should be a red flag concerning at
least their business practices, if not their business ethics. An
escrow account should specify that it is an escrow account. The
funds in an escrow account always belong to the borrower until
the expense the account is set up for is paid.
It is important to use escrow so that both parties are
protected, and the funds are held for specific expenses. This
protects against fraud, as well as guaranteeing that certain
expenses like property taxes and insurance payments are made on
time to protect the lender's interest in the property. The home
buyer has the security of knowing that the money will go exactly
where it should, and can not be removed for any other reason.
Copyright © 2007 Joel Teo. All rights reserved. (You may
publish this article in its entirety with the following author's
information with live links only.)
About The Author: Joel Teo writes on various financial topics
including Las Vegas Real Estate. Learn more about Las Vegas Real
Estate Investing at http://www.realestateinvestment101.info
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