If you are new to the home-buying process, there may be a lot of terms that come up during the process that you may not fully understand. One of the terms you might hear is the word escrow. Escrow is a word commonly used in real estate, and it is something you should understand when you are looking at homes for sale.

What does escrow mean?

The word escrow represents an account used by homeowners for certain types of expenses, and it can also refer to an account used during the process of buying a house. When buying a house, you will need to put money down, which is called earnest money, when you make an offer. The real estate agency will put this money in a bank account called an escrow account. The money is safe there, and no one can touch it. If the deal does not go through, you get the money back. If the deal goes through, the seller receives the money.

Escrow accounts are also used with mortgages, and they are designed to help homeowners save up money to pay for two main things, which are home insurance and property taxes.

Do you have to use escrow when buying a house?

During the process of buying a house, you will have to use an escrow account when making an offer and working on the deal, but you might not be required to use one with your mortgage. Some lenders require this, while others do not. If your lender does not require it, you could still choose to use one.

What are the pros and cons of escrow accounts with mortgages?

If you have the choice to use an escrow or not, you should understand the pros and cons before making your decision. The main con is that the account will not earn interest, which means you are saving money all year without interest-free. The pros in this is that it makes it much easier for you to afford paying your homeowner's insurance premiums and your property taxes, simply because you will save a small portion of these bills each month. When the year ends, you will have enough money to pay for these things out of the money you saved in your escrow account.

Understanding key terms like this is important when buying a house, as you will encounter terms like this. If you have questions about other terms you hear during this process, talk to your real estate agent about them.