Understanding Escrow: A beginner’s Guide for Maryland Homebuyers

Buying your first home can feel overwhelming, especially when you see unfamiliar terms like escrow during the process. Understanding escrow will help you be prepared and make confident decisions during a real estate transaction. Regardless of where you are in your homebuying process, this guide explains everything you need to know about escrow before and after closing.

What is Escrow?

Escrow is an agreement in which a neutral third party temporarily holds money or documents on behalf of another party. During the home-buying process, an escrow agent or the title company holds funds or documents in a secure escrow account until certain conditions are met. Being “In Escrow” means that the homebuying process is moving forward.

The Two Types of Escrows

• Escrow during the home purchase (pre-closing)
• Escrow after you become a homeowner (post-closing)

Escrow During the Home Purchase

Once the buyer’s offer is accepted by the seller, the money goes into an escrow account instead of the seller.

How it works

1. Earnest Money Deposit: It is funds provided by the buyer to show seriousness about the purchase of the home. In Maryland, it is typically 1%- 3% of the purchase price. The fund is placed in an escrow account and remains there until closing. 

2. The Due Diligence Period: A timeframe where other steps need to be completed. The funds are only released after the terms of the contract have been met by both parties and the following steps have been completed. 

• Home inspection
• Appraisal ordered by the lender
• Mortgage approval process
• Title search
• Review of disclosures and contract

3. Closing Day: Once all conditions have been met by all parties, the following steps take place:

• Ownership is transferred to the buyer.
• The Earnest money is released, and the seller receives the sale funds.
• The lender funds the mortgage.
• The buyer receives the keys.

Escrow After You Become a Homeowner

Most mortgage lenders require escrow accounts after a home purchase to collect money for Property Taxes and Homeowners’ Insurance. This allow homeowners to contribute each month toward these bills instead of making separate payments.

A mortgage payment is often made up of four components (PITI):

• P – Principal
• I – Interest 
• T – Taxes
• I – Insurance 

Why Do Lenders Require Escrow?

Lenders require escrow because it protects both the homeowner and lender. It prevents missed tax payments, insurance lapses, and spreads large payments into manageable monthly payments. 

Why Does Mortgage Payment Change? 

The Escrow is reviewed annually, where the lender compares what was collected, what was paid, and adds any updated taxes and insurance costs. If there is an increase in taxes or insurance, the payment will increase, but if there is a surplus, the lender may issue a refund.

Maryland Homebuyer Tip

Property taxes in Maryland vary by county and municipality. When searching for a home, it is important to look beyond the home’s purchase price and consider the total monthly housing cost. Ask your lender or agent to help estimate the following costs.

• Principal and interest
• Property taxes
• Homeowners Insurance
• HOA or Condominium fees, if applicable 

---

Frequently Asked Questions

Is Escrow required for all Mortgages?

Generally, yes, it is required for government backed and high-risk loans, but you may be able to waive escrow requirements under some loan terms.

Can I get My Earnest Money Back?

Yes, but it also depends on your contract terms and contingencies included in the agreement.

Does Escrow Earn Interest?

Interest rate rules differ by state and lender. In Maryland, mortgages do earn interest under certain requirements. Contact your lender for specific details about your State.

What happens if my escrow account is short?

Your lender may increase the monthly mortgage payment or allow a lump-sum payment.