Homebuyers

Escrow Fees Explained: What Every Homebuyer Should Know

Purchasing a home remains a goal for many people. But coming up with a down payment isn’t the only big expense that homebuyers typically face.

They are also responsible for paying closing costs. These costs often include placing money into an escrow account until the sale is final.

Buyers may not be aware of these costs, which can add to the amount they planned to pay for a home.

Even sellers may not know just how much money the sale will cost them, taking a chunk out of what they hoped would be all profit.

What are escrow fees?

Escrow costs generally include the fees involved with buying a home. These often include:

• Mortgage origination fees that are paid to the lender
• Property taxes and local government fees
• Homeowners insurance premiums
• Title insurance premiums
• Real estate attorney fees
• Escrow company fees

In addition, buyers often place their earnest money deposits into escrow accounts. This is their “good faith” deposit to show the sellers that they plan to go ahead with the purchase.

A neutral third party typically places these fees in an escrow account and holds the money there until the deal closes. Your mortgage lender often sets it up.

Homebuyers may encounter two different kinds of escrow during the purchase. Transaction escrow holds money and documents until all conditions of the sale have been met.

A mortgage escrow account may stay in place after closing. It lets the loan servicer collect part of the homeowner’s property taxes. It also collects homeowners insurance premiums with each monthly mortgage payment. The servicer then pays those bills when they come due.

“[The escrow company] will set money aside for each party” involved in the sale, said Sergio Garáte, director of the Goizueta Real Estate Program at Emory University in Atlanta. “There’s the amount of money that we need to pay to this person and there’s how much money we need to pay to the other person.”

How much are escrow fees?

Many homebuyers don’t realize how much escrow costs will be. Generally, these fees add up to between 1% and 2% of the purchase price of the home.

The amount varies based on the home’s location, the included expenses, and the escrow company managing the account.

The term “escrow fees” can cause confusion because it may refer to the fee charged by an escrow or settlement company or to the larger amount collected for taxes and insurance. Mortgage origination charges, title insurance, attorney fees, and government recording fees may appear with escrow charges on closing documents. However, they are separate closing costs.

“The buyer submits ‘earnest money’ with their offer,” said Tres Kirkland, a real estate agent with Atlanta Communities Real Estate in Woodstock, Ga. “This is just to show they are serious.”

“At closing, this money is released and applied to the buyer’s down payment or closing costs,” said Kirkland.

These expenses are in addition to your down payment. It may be possible to add some escrow fees to your mortgage.

But it is important to weigh the pros and cons first.

If you roll the fees into your mortgage, you will pay interest on that amount for the life of the loan.

Homebuyers should also prepare for an initial escrow deposit at closing. A lender may collect several months of property taxes and homeowners insurance premiums. This helps build a sufficient cushion in the account. The amount depends on when those bills are due and when the purchase closes.

For example, suppose a homeowner’s annual property taxes are $6,000 and homeowners insurance costs $1,800 a year. The mortgage servicer would collect about $650 per month for the escrow account. That includes $500 for property taxes and $150 for insurance.

If the lender requires three months of those expenses to establish the account at closing, the homebuyer would deposit about $1,950 into escrow. The exact amount depends on the property’s taxes, insurance premium, closing date, and lender requirements.

Before closing, homebuyers receive a Closing Disclosure that itemizes the mortgage terms, projected monthly payment, closing costs, and cash needed to complete the purchase. Homebuyers should compare it to their earlier Loan Estimate.

They should ask their loan officer about any unfamiliar charges. They should also ask about unexpected charges. Lenders generally provide the Closing Disclosure at least three business days before closing, giving homebuyers time to review the numbers.

Some escrow fees may be negotiable

In some cases, the buyer and seller agree to split escrow fees evenly. More often, though, they negotiate.

For instance, a seller may offer to pay more than the buyer to close the sale. Or the seller may agree to contribute to repairs on the home to seal the deal.

It’s usually a good idea to negotiate because it could save you some money.

Seller contributions may help with certain eligible closing costs, subject to the mortgage program’s limits and the terms of the purchase agreement. Homebuyers should discuss any proposed concessions with their loan officer before finalizing the offer.

“Rarely, but sometimes, the seller has agreed to provide an ‘allowance’ for some type of repair that is going to be done after closing,” Kirkland says. “The closing attorney may hold these funds in an escrow account until the repairs are completed and then will release the funds to either the contractor or the buyer.”