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By Juhlin Youlein
The free world of capitalism is made up of lenders and borrowers. A lender gives money to a borrower and in return the lender will receive interest from the borrower on each return payment. The lender’s risk comes primarily from the chance that the borrower will not make good on their payments. To hedge this bet, lenders often need reassurances or insurance that the borrower will not default. This is true in almost all the markets of capitalism but is especially true in real estate markets. Often times, the lender in a real estate market, such as a mortgage company or bank, will be confident that the borrower will make their monthly mortgage payments, but will be concerned that the borrower will default on their homeowners insurance or property tax payments.
If a borrower defaults on their homeowners insurance then they will no longer be insured against extreme property damage. If the borrower then has their home burn down, they can easily walk away and the lender will no longer possess collateral on the loan. If the borrower does not make their property tax payments, then the government can put a lien on the home. Both scenarios are a nightmare for the lender. To insure that the borrower makes their insurance and tax payments, both parties will want to set up an escrow account.
An escrow account is where a third party holds the money meant for a payment until the transaction takes place and then the money is released at a prearranged time. A real estate escrow account is maintained by an escrow agent who works for both the lender and the borrower. To help give an example of how an escrow works, let’s say there are two buddies who both make a bet on a football game and they give their money to a third friend to hold on to the money until the game is over and this friend then gives the money to the winner of the bet. This way, both of the parties betting will know that they will get the money they agreed to if they win the bet. Another example of an escrow concept being used is with a vending machine. A person puts money into the machine and the money is held in a figurative ‘waiting area’ until the machine works properly and then drops the money into the coin vault and gives the buyer what he chooses. If the machine does not work properly, then the vender can push a button and the money will come back out at no loss to the buyer.
In the world of real estate an escrow account is vital. If a borrower has one annual property tax payment of 3,000 dollars and an insurance payment of 500 dollars, then there is a great chance that when the time for the payment comes, the borrower will not be able to make the lump sum payment. Therefore, in the mortgage contract, the borrower will make monthly payments to an escrow account which will in turn make the lump sum payment at the due date for the taxes and insurance. In this case, instead of paying $3,500.00 at one time, the borrower will pay a much more manageable $300.00 a month to the third party escrow agent and the agent will make sure the lump sum payment is made on time. Both the lender and the borrower are satisfied because of the added security added to the large mortgage loan.
About the Author: Juhlin Youlien writes for the Website Our Best Real Estate which is Exclusive to Arizona featuring Paradise Valley AZ homes for sale, Fountain Hills AZ homes for sale, Phoenix real estate and Tucson AZ homes for sale
Source: isnare.com
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