While buying a home seems like a straightforward process, the transaction can be very confusing for home buyers. One of the most commonly misunderstood costs associated with closing a real estate transaction is escrow costs. Escrow costs are fees charged by the escrow holder who completes the transaction on behalf of the buyer and seller. Much like any other business, escrow holders must charge for the services they provide and make a profit. Escrow costs are typically paid by the buyer at closing and normally include fees for the creation of the account, holding of the documents of sale, and closing of the escrow account. Fees for these services vary among escrow companies and from area to area.
In general, “escrow” refers to the holding of money by a third party on behalf of the other two parties directly involved in making the transaction. In real estate, the money for purchase of a property is often held in an escrow account while the house is being inspected or other conditions of sale are being met. The buyer deposits money into the escrow account to show the seller they are capable of making payment. Then, once the conditions of sale are met, the escrow holder transfers the payment to the seller of the property. If the conditions of sale are not met, then the money reverts back to the buyer. In this way, escrow accounts serve as protection for both buyer and seller.
Usually, the escrow holder will provide all parties with a minimum schedule of fees, which allows for extra charges based on the terms of the transaction. Sometimes additional fees will be incurred, based on the circumstances of the transaction. The escrow agent should be able to provide home buyers with an estimate of the escrow costs as well as fees charged by other parties, such as lenders and title insurance companies. Escrow calculators also are available online for buyers to be able to estimate fees so they can budget beforehand.
Escrow costs are commonly confused with closing costs because most of these fees are paid when the transaction is complete or closed. However, closing costs typically include all the fees incurred by the completion of a real estate transaction. Generally, closing costs on a home are approximately two to four percent of the purchase price. Closing costs include escrow costs, as well as fees for legal services, inspections, loans, title insurance, and taxes.