Kathy Henne: What to know about escrow, earnest money

When you buy a home, or just make an offer, you will encounter the term “earnest money.” Like making a friendly bet and asking a third party to hold the wager money, the trust account is where the earnest money is held until closing. The earnest money is a sign of good faith made by the buyer to the seller.

When the terms of the purchase and loan agreements have been met, the money is released. When your application is approved and the loan takes effect, the lender will likely require money for property taxes and homeowner’s insurance to be held in an escrow account. These funds are added to your monthly mortgage payment and disbursed when the tax and insurance bills are due.

This protects the lender by ensuring a lien isn’t placed against your property for non-payment of taxes, and your home (their collateral) is protected against catastrophe. But escrow also benefits borrowers by spreading the large annual payments for taxes and insurance over twelve months.

For example, if your taxes are $1,600 per year and your insurance is $800, you’re budgeting a reasonable $200 per month instead of making those big payments. Escrow accounts do not earn interest, and if you make a large enough down payment, you may be able to avoid the monthly escrow and pay the bills directly. Ask your loan officer about the pros and cons. They’ll be happy to explain your options.