Red Flags When Buying a House

With so many considerations to weigh in potential properties, here are some red flags to look out for when buying a house, especially during the viewing.

• Poor tiling or flooring work. This would be a sign of a bad flip or remodeling job, and you could end up spending a lot of money to fix it.
• Foundation issues. Hairline cracks are usually a sign the house is settling as it ages, but larger gaps or cracking could signal a bigger issue with the foundation.
• Poor maintenance. If it is apparent from the walk-through that the seller has failed to keep the property in good condition, there might be even worse problems beneath the surface. A poorly maintained home might require costly repairs or renovations.
• Nearby water. If the home is near a pond, lake, canal, ocean or other body of water, the property could be at a higher risk of flooding. Ask your real estate agent to find out if the property is in a FEMA flood zone, which might trigger the need to buy special flood insurance in addition to homeowners insurance.
• Poorly installed windows. This could be a sign of foundation problems or a bad remodeling job requiring new windows. If you need help, check with your real estate agent.
• Mold. Check the bathroom and sink cabinets, as well as take a look around water pipes or drains. Look for small black or gray spots. You can also check the caulking around faucets as well as look for patches on the ceiling.
• Water damage. A musty odor may be a sign of water damage. Be sure to check walls and ceilings for water lines, and look out for exposed piping in basements or laundry rooms to check for rust, water stains or leaks.
• Improper ventilation. Poor ventilation increases the risk of mold. Look for condensation on windows or slightly bubbled or peeling paint around windows, doors or vents. This might mean there’s moisture in the walls or in the ceiling drywall. Source

DRE ID # 01769353  NMLS ID # 394275

Home Loans for Business Owners and the Self-Employed

Being your own boss comes with freedom—and sometimes, a little extra paperwork when it’s time to qualify for a loan. If you’re a business owner, contractor, or self-employed professional, I specialize in helping clients with non-traditional or complex income find the right path to homeownership or investment property financing.

At Work & Associates Home Loans, I understand how to present your financial picture clearly to lenders, using options like bank-statement loans, asset-based programs, or DSCR investment loans to make approval possible.

Your hard work deserves to open doors—not close them.

Let’s talk about your financing options today!

Phone: 916-847-3090

1350 Old Bayshore Hwy Ste. 520

Burlingame,  CA  94010

margeate@workhomeloans.com

NMLS ID 394275 | DRE ID 01769353

Why Refinance?

When is the Best Time to Refinance—Even If You Already Have a Low Rate?

It’s a question I hear often: “Why would I refinance when my rate is already low?” While a lower interest rate used to be the main reason to refinance, today’s homeowners are looking beyond rates to make strategic financial decisions.

If you’ve built significant equity, a refinance can help you access cash for home improvements, debt consolidation, or investments—often at better terms than credit cards or personal loans. Others refinance to remove mortgage insurance, change loan terms, or add or remove a borrower after a life event or business change.

Even if your rate is lower than what’s available today, it’s worth reviewing the whole picture—your goals, cash flow, and current financial needs. Sometimes, the value of flexibility outweighs a slightly higher rate.

At Work & Associates Home Loans, I take the time to walk you through your options and help you decide whether a refinance makes sense for your situation—not just based on numbers, but on what’s right for you.

Let’s review your current mortgage and explore your best path forward.

Closing Costs: What are they and how much are they?

Mortgage closing costs include expenses related to applying for the loan and finalizing a real estate sale. Some of the costs are related to the property, while others are related to the mortgage lender’s services and the paperwork involved in the transaction. You’ll typically pay most of these costs on closing day — though, if you have certain types of government-backed loans, you may be able to roll the closing costs into your mortgage.

How much are closing costs?

Mortgage closing costs are typically about 2 to 5 percent of your total loan amount. For a $400,000 loan, for example, closing costs could range from $8,000 to as much as $20,000.

The total amount you’ll pay in closing costs depends on three key factors:

1.) The price of the home

2.) The home’s location

3.) Whether you’re buying or refinancing

According to a 2025 report from Lodestar, a closing cost data provider, the average closing costs for a borrower buying a single-family home in the U.S. are $4,661. The average closing costs for a refinance are $2,403. Keep in mind that these averages don’t typically include real estate commissions.

However, those costs vary widely across the country, partly due to state and local tax laws. For example, in the survey, homebuyers in Washington, D.C. paid the highest average closing costs for a purchase loan, at $17,545. New York and Delaware came in second and third, respectively, with average closing costs of more than $13,000 and more than $12,000. The states with the lowest average closing costs were Missouri ($1,740), Iowa ($1,640) and South Dakota ($1,551).

Who pays closing costs?

While the buyer tends to pay many closing costs, the seller is responsible for paying some, too. Buyers can try to negotiate with the seller to cover some of their costs — called “seller concessions” — though that’s typically only feasible if the seller doesn’t have competing offers.

In addition, there are limits on seller concessions, depending on the buyer’s loan type. If you are purchasing a property with a conventional loan, you may negotiate up to 9 percent of the purchase price or appraised value, whichever is lower. FHA loans and USDA loans allow for up to 6 percent, while VA loans have a maximum of 4 percent total. Jumbo loans vary based on the lender.

Closing costs paid by the buyer

Here are closing costs you can typically expect to pay if you’re buying a home:

• Appraisal fee: This fee covers the cost for a licensed appraiser to determine the home’s value. The average appraisal fee for a single-family home is about $350, according to Angi. While this is considered a closing cost, you typically pay it well before closing day.
• Attorney fee: You may choose to use an attorney during your closing, or your state may require one.
• Credit check fee: Chances are, if you’re in the process of purchasing a home, you’ve checked your credit score and report already. But your lender will want to make its own inquiry, and there’s typically a fee associated with doing so.
• Discount points: By purchasing discount points (also called mortgage points), you can lower your mortgage rate. You’ll usually pay 1 percent of the loan principal for a 0.25 percent rate reduction.
• Origination fee: Lenders can charge an origination fee for creating the loan, which is generally 0.5 percent to 1 percent of the amount you’re borrowing. This fee might include other costs, such as the application fee and the underwriting fee.
• Per-diem interest: The per-diem interest rate on a mortgage is the daily interest that’s charged between the closing date and the start of the billing cycle.
• Prepaid homeowners insurance premiums, mortgage insurance premiums, property taxes and homeowners association (HOA) fees: Your lender may require a year of advance insurance and property tax premiums to be held in escrow. If your property is located in a community with a homeowners association, you may have to prepay some of those fees at closing, too.
• Property survey fee: Your lender may require this to confirm that your property boundaries match the title. The cost depends on the property size, the survey type and your location.
• Real estate agent commissions: The buyer’s agent and the seller’s agent typically split a commission of about 5 percent of the sale price.
• Recording fee: This fee goes to a government agency that records the real estate transaction and makes it a public record. It’s often around $125.
• Title insurance policy: Lenders require borrowers to obtain title insurance in case problems arise with ownership after the sale. This policy protects the lender, and the cost is usually about 0.50 percent of the amount of the mortgage. You may also buy your own title insurance for an additional cost.
• Title search fee: Unless you’re buying a new construction home, your lender will have a title company search property records to ensure there aren’t any issues with the title of the home, such as a tax lien. The fee for a title search is around $200.
• Transfer tax: Many states impose a transfer tax when real estate changes hands. Often, the seller pays this tax, but in some places, the cost is shared with the buyer.

How to Lower your Closing Costs

You can’t get away with not paying any closing costs, but there are ways you can lower the amount. Here are a few ways to reduce closing costs:

• Look for lenders that offer discounts: Consider working with a mortgage lender that doesn’t charge an origination fee or that’ll offer you a discount. If you’re getting your mortgage at your bank, you can also try asking for a discount or fee waiver, since you’re already a customer.
• Apply for down payment assistance: Particularly if you’re a first-time homebuyer, explore down payment assistance and grants that can help cover closing costs.
• Use a no-closing-cost loan: Don’t let the name fool you — you’ll still pay closing costs with a no-closing-cost loan. Instead of paying them upfront, you’ll finance them with your mortgage — and pay interest on them — or pay a slightly higher interest rate.
• Negotiate seller concessions. To encourage a sale, a seller might agree to pay some of your costs.
• Shop around when possible: You’re allowed to shop for certain closing costs, like title insurance, title searches and home appraisals. Getting comparison pricing can help you reduce your closing costs.

Source

What is A Lender’s Role?

A mortgage lender is a financial institution that ultimately approves your mortgage loan so that you can purchase a home and lends you the money to do so. Lenders lay out your financing options, review (or underwrite) your income and credit documentation, and work with you to determine whether you qualify for a loan. They also determine the amount you qualify for and provide explanations for the different options available to you.

Even though the process can seem overwhelming, it’s important to shop around before deciding on the right lender. Speaking to multiple lenders can make a difference in your ability to get the best mortgage and loan terms for your needs. If you don’t know where to look for a lender, start by asking friends, family, real estate professionals, and your local bank for recommendations. Source

NMLS ID 394275 | DRE ID 01769353

What Is PITI?

PITI is an acronym that stands for principal, interest, taxes and insurance. Many mortgage lenders estimate PITI for you before determining whether you qualify for a mortgage.

Lending institutions don’t want to extend you a loan you might have trouble affording. That means it’s a good idea to understand the mortgage pre-approval process (also called initial approval) and work with a lender before you start shopping. Your lender can help you start the process with an understanding of what PITI you can afford so you can shop accordingly.

Now that we know the definition of PITI, let’s break down each of its components and analyze their significance...

Principal

The principal of your mortgage loan is the amount you owe before any interest is added. For example, if you buy a home worth $250,000 and put forward a 20% down payment ($50,000), your principal amount would be $200,000.

However, over the course of your loan’s lifespan, you’ll pay more than your original $200,000 because of interest. Most lenders look at your principal balance and debt-to-income ratio (DTI) when they determine what interest rate you’ll pay. Your DTI is a calculation of your ability to make payments toward money you’ve borrowed. It’s the total sum of your monthly debt payments divided by your gross monthly income. DTI is always expressed as a percentage.

Interest

An interest rate is a percentage showing how much you’ll pay your lender each month as a fee for borrowing money. Your mortgage lender calculates interest as a percentage of your principal over time. For example, let’s say your principal loan is $200,000 and your lender charges you a 4% interest rate. You’ll pay $8,000 (4% of $200,000) in interest for the first year of your mortgage.

You may hear the term mortgage amortization in reference to your interest and principal payments. Amortization is a scale that tells you how much of your monthly mortgage premium is applied to your principal loan balance and how much goes toward interest.

How much do you pay in interest?

At the beginning of your loan, most of your mortgage payments cover interest instead of principal. As your loan matures, the amount of interest you pay decreases because the principal decreases. That is, you only have to pay interest on the portion of the loan you haven’t paid off.

For example, you may pay $8,000 in interest on the first year of your $200,000 mortgage. But by the time your principal decreases to $50,000, you’ll pay only $2,000 annually (4% of $50,000). This is why it’s so important to choose a home within your price range. It’s easy to fall behind on payments if you can’t pay off your interest and also make progress on decreasing your principal.

Taxes

You must pay taxes on your property. They’re an important component to consider when determining how much you can afford. One of the most expensive taxes most homeowners pay is property tax, which varies by location. Property taxes support your local community. They pay for services like libraries, local fire and police departments, public schools, road maintenance, park maintenance and community development projects. The easiest way to incorporate PITI into your home buying journey is to get started with a lender. Upon doing so, your potential lender will do PITI calculations for you and let you know what you can afford.

However, the home buying procedures don’t always go in a straight line. You may start the process because you’ve spotted a home you love, but you don’t yet have an initial mortgage approval. In this case, it’s a good idea to calculate your PITI yourself to see if it’s in your budget. Mortgage lenders will work with any borrowers who qualify and it’s also important to note that some loan types don’t even have a housing ratio requirement. When securing a loan, your interest rate will depend on your credit score and how much you can offer for a down payment.

How much do you pay in taxes?

It’s difficult to say exactly how much you can expect to pay in taxes because they depend on your home’s value and your local property tax rate. Taxes can also vary from year to year.

As a rule, anticipate paying $1 for every $1,000 of your home’s value every month in property taxes. For example, if your home is worth $250,000, you’ll pay around $250 per month in property taxes – or about $3,000 per year. Most states require you to get an official and unbiased home appraisal so they can accurately estimate your taxes. Your mortgage lender usually includes the cost of an appraisal in their list of closing costs.

Insurance

Most states’ laws don’t require homeowners insurance. But most lenders require you to maintain a certain level of property insurance as a condition of your loan. Most homeowners insurance plans cover your property if a fire, lightning storm or break-in occurs, leaving property damage.

As an add-on, some homeowners insurance policies include additional coverage for damage from flooding and earthquakes. If you have something valuable in your home, like an expensive piece of artwork, jewelry or a musical instrument, you may purchase a high-value layer of protection called a rider. This is available in addition to your standard policy.

How much do you pay in homeowners insurance?

As with property taxes, it’s difficult to say exactly how much you’ll pay in homeowners insurance. Every insurance company uses its own unique formula to calculate rates. Factors that often influence your insurance premium include:

• Your home’s value
• Whether you live in a rural or urban area
• Your home’s proximity to a fire department or police station
• Nuisances on your property or something that could injure children who enter your property (pool, trampoline, aggressive dog, etc.)
• How many claims you make on average each year for other types of insurance

As a general rule, expect to pay about $3.50 for every $1,000 of your home’s value for homeowners insurance. In this example, you’ll pay $875 per year on a property worth $250,000, equaling about $73 per month. When you add the costs of your principal, interest, taxes and insurance together, you get the average total cost of a mortgage per month.

Why does PITI matter in real estate?

Your PITI matters because it gives you a rough idea of how much you can afford on a home purchase. That’s why it’s important to calculate a reasonable PITI before shopping. You’ll save time and stress if you only consider homes within your budget.

Additional costs to PITI payments

Keep in mind, your monthly PITI may not cover the entirety of home buying costs. You may need to budget for repairs, utilities and maintenance on top of your mortgage payments, taxes and interest.

You also need to plan and budget for the down payment and closing costs required by your lender. Some of the closing costs you may see include:

• Home inspection fees
• Real estate attorney fees
• Home appraisal costs
• Title transfer costs
• HOA fees
• Utilities

Think about all these costs, in addition to your PITI, ahead of deciding whether a home is a good investment for you. Source

NMLS ID 394275 | DRE ID 01769353

What Not to Do When Buying a House

Buying a house can be stressful. You’re trying to learn when it’s the best time to buy a house, then find the right house, secure a loan, battle other buyers and plan a move. And when it comes to the loan process, the last thing you want is to drag it out or potentially stop it altogether because of preventable missteps. 

The good news is that with a little careful planning and research, you can learn what not to do when buying a house and avoid some potential pitfalls. Remember, your credit will be monitored right up until your loan closes, and so it’s important to stay on top of your financial situation. Here are six things you shouldn’t do when you’re in the process of buying a house in order to set yourself up for success. 

1. Making Credit Inquiries

Every time a business checks your credit score — sometimes called a “hard inquiry” — your score takes a small hit. Maybe a few points doesn’t seem like much of a problem. But if you’re on the edge of approval, or you’re teetering on the edge of securing the rate you were quoted during pre-approval, a few inquiries could spell trouble. 

What about errors on your credit report? You’ll receive a credit report during the initial stages of securing a loan. Fight the temptation to seek out (and dispute) errors. Now is not the time to make inquires, cancel cards or pay off debt, all of which can change your credit score. If your report illuminated concerns you’d like to address, tackle the issues once your loan is secured. Your credit score can be artificially high if you dispute the mistakes while securing a loan, and mortgage lenders may be wary to approve you because of it. 

On the other hand, if your goal is to buy a home in the near future, resolve the errors now. The process can take months.

2. Opening a New Line of Credit

Owning a new home means lots of new expenses. You want new furniture to fill it and paint to spruce things up. But it’s important to resist the urge to open a new Home Depot credit card too soon.

Taking on new debt or even creating the opportunity to take on that debt, no matter how small, could throw off your debt-to-income ratio — a magic number in mortgage lending — and disqualify you. 

Just say no to store credit cards, extending an existing credit line (that new bedroom set can wait) or any other changes that will make lenders look twice when you’re preparing to buy a house.

3. Missing a Payment

Be sure you’re paying your bills on time. In the stress of preparing to buy a house, it’s easy to let a payment slip. But any missed payment could have serious consequences for your credit score. That’s especially true for missing mortgage payments.

If you are still paying another mortgage or own a rental property, be sure you’re up to date. Missing a mortgage payment will make you ineligible for a loan from most lenders for at least a year — bad news if you’re trying to buy a new property.

Missing other bills, like your utility bill or car payment, could be just as detrimental when you’re preparing to buy a home. A missed bill, even months before you apply, could lower your credit score and jeopardize your chances of securing a loan. Even if your score isn’t low enough to disqualify you, a big enough change could require a new approval — and that means delays.

If you can, automate your payments so that you don’t even need to remember. Or set up calendar alerts so that you have extra reminders. Don’t leave it to your memory, especially if you’re busy.

4. Moving Money Around

Wait until your home closes to make any big transfers, deposits or withdrawals. Your loan approval is based on the financial picture that you provided at the time of application. Any changes you make — which could mean adding or taking away money — will impact that.

So keep the money where it is, and if you make a large deposit, transfer or withdrawal (think over $500 or so), you’ll need to submit a letter documenting the source of the money, along with proof. Talk to your financial advisor or lender if you need advice.

Lenders are on the lookout for loans that need to be paid back, so if you receive a monetary gift, consider waiting to deposit it or be prepared to get a letter from the gift-giver stating you won’t need to pay back the amount. Even after you’ve received final approval, confirm with your lending agent before moving money to pay closing costs.

5. Changing Jobs

During the mortgage loan process, change — even good change — could set you back. Avoid a change in job status that will cause a lender to question your financial stability. Going from full time to part time, salary to commission and employee to contractor could all raise red flags. 

Changes in the other direction, like moving from part-time to full-time employment or taking on a new role at the same company, shouldn’t impact your ability to close, but err on the safe side and consult your lending agent before making any changes. 

6. Leasing or Buying a Car or Other Vehicle

To a lender, a car represents more debt. It doesn’t matter if you can lock in a great interest rate or if the car is well within your means; big changes in your debt-to-income ratio — and cars qualify as big — will, at the very least, delay the process of buying a home. In general, err on the side of caution until you’ve locked down your mortgage and new home. Source

What Is a Mortgage Rate?

A mortgage rate is the interest charged for a home loan represented as an annual percentage. Mortgage rates change with the economic conditions that prevail at any given time. However, the mortgage rate that a homebuyer is offered is determined by the lender and depends on the individual's credit history and financial circumstances, among other factors.

Consumers can choose from variable-rate or fixed-rate mortgages. A variable rate goes up or down with the fluctuations of national borrowing costs and alters the individual's monthly payment for better or worse. A fixed rate remains the same for the life of the mortgage. The prevailing mortgage rate is a primary consideration for homebuyers seeking to purchase a home using a loan. The rate a homebuyer gets has a substantial impact on the amount of the monthly payment that they will pay.

Mortgage rates are highly sensitive to economic conditions. Since 1980, average mortgage rates for a 30-year fixed-rate mortgage have hit a high of 18.63%, during a period of runaway inflation in 1981, and a low of 2.67% in 2020, in the early days of the COVID-19 pandemic. At the end of May 2025, the average national rate was 6.89%.

How much does the interest rate matter? Say you want to buy a house that costs $400,000. You put $80,000, or 20%, down. You need to finance $320,000. A mortgage calculator makes this easy.

Your monthly payment, not including property taxes or home insurance, on a 30-year mortgage would be:

• $1,293 at the historic low 2.67% interest rate
• $2,105 at the mid-2025 average 6.89% interest rate
• $4,987 at the historic high 18.63% interest rate

Determining a Mortgage Rate

A lender assumes a level of risk when it issues a mortgage, for there is always the possibility a customer may default on the loan. There are a number of factors that go into determining an individual's mortgage rate, and the higher the risk, the higher the rate. A high rate ensures the lender recoups the initial loan amount at a faster rate in case the borrower defaults, protecting the lender's financial investment.

The borrower's credit score is a key component in assessing the rate charged on a mortgage and the size of the mortgage loan a borrower can obtain. A higher credit score indicates the borrower has a good financial history and is more likely to repay debts. This allows the lender to lower the mortgage rate because the risk of default is deemed to be lower.

Is a Fixed-Rate Mortgage or a Variable Rate Mortgage Better?

A fixed-rate mortgage gives you security. Your payment will never go up, no matter what happens to interest rates in the world outside. If rates go down, you can refinance.

A variable-rate mortgage usually has a slightly lower interest rate to start, keeping your costs low at a time when you might be squeezed for cash. That's because the bank is betting that interest rates will go up, while you're betting they'll go down. If you lose that bet, your monthly payment will go up, and you won't have the option of refinancing until they go down again.

NMLS ID 394275 | DRE ID 01769353

Source

What Is Earnest Money and How Much Should I Put Down?

What Is Earnest Money?

When you make an offer to buy a house, earnest money is cash you include with your offer to show the seller you’re serious—or earnest. Also called good faith money or a good faith deposit, earnest money secures your offer. In return, the seller takes their home off the market, makes it available for inspections, finishes any agreed-upon repairs, and lets the buyer know about anything bad relating to the house (also known as a disclosure statement) to help complete the sale. Earnest money is usually 1–3% of the purchase price, but it could be as high as 10% in a hot real estate market. Sometimes it’s a fixed amount, like $5,000.

While you wait to close on your home, your earnest money goes into an escrow account that’s managed by a real estate brokerage or title company. This basically means that a third party will hold the money until the deal is finished. (Never give the money directly to the seller because you run the risk of losing it if the deal falls through.) On closing day, your earnest money usually goes toward closing costs or your down payment (or both).

So, what if the deal goes sour? You can usually get your earnest money back, as long as your sales agreement has the right contingencies (aka conditions) laid out. (We’ll talk more about this later.)

How Much Earnest Money Should I Put Down?

The short answer is, you usually need 1–3% of the price you and the seller agree upon. But that isn’t always the case.

In some markets, you’ll need a fixed amount—like $1,000 or $5,000. In other communities, the focus is on the percentage. And in really hot real estate markets, like Silicon Valley, it’s not uncommon to see six-figure earnest money deposits. Since that isn’t chump change, talk with your real estate agent about how much earnest money you should put down to help you play by the rules in your area.

Should I Pay Earnest Money?

Earnest money isn’t technically required, but it’s pretty much standard these days. If there’s any competition in your market at all, you’ll want to put down earnest money so a seller will take your offer seriously. Basically, a good faith deposit is putting your money where your mouth is.

For example, let’s say Joe and Sally Smith find a house they love and make a $250,000 offer on it with $5,000 (2%) of earnest money. If the Johnson family also offers $250,000 with similar terms but no earnest money, the seller is more likely to accept the Smiths’ offer.

Once the seller accepts the offer, the Smiths have to cut a check for $5,000 that goes into escrow while their lender does all the prep work for their loan. In the meantime, the Smiths also pay to have the home inspected and appraised. If all goes according to plan, they’ll close on the home in 30 to 45 days, and their earnest money will be applied to their closing costs or down payment.

Is Earnest Money the Same as a Down Payment?

Now, before we move on, let’s make sure we’re clear—earnest money is not a down payment. A down payment is the portion of the total home price you pay before financing the rest with a mortgage. We recommend 10–20% of the purchase price of the home with a 15-year fixed-rate mortgage. (If you’re a first-time home buyer, a 5% down payment will work.)

Think of it this way: Earnest money makes your offer official, and a down payment helps make your purchase official. But the earnest money you pay isn’t lost. When it’s time to close on your loan, you can choose to have your earnest money applied to your down payment or your closing costs.

When you’re figuring out how much money you'll need to buy a house, you don’t have to worry about saving extra for earnest money on top of what you already plan to save for closing costs. Earnest money is simply due up front when you make the offer, unlike the down payment and closing costs, which are due when you close on the home. Source

What Is an Escrow?

What Is Escrow?

Escrow refers to a neutral third party that is put in charge of holding something of value—usually cash—until a transaction between a buyer and seller is complete. The money is kept safe in an escrow bank account managed only by that third party. Think of escrow kind of like a referee in a football game. They take no sides and make sure everyone is playing by the rules until the game is over. But the name of the game here is real estate.

If you’re a home buyer or seller, being in escrow means different things:

• As a buyer, you agree to pay a percentage of the home price into escrow for safekeeping.
• As a seller, you agree to take the house off the market while it’s in escrow and make it available for inspections.

The main job of escrow is to ensure a fair and smooth real estate deal from beginning to end. You can use escrow accounts for other transactions like online shopping purchases (where the escrow service holds onto the money from the buyer until confirmation that the goods have been received). But right now we’re only dealing with escrow in real estate.

Types of Escrow Accounts

Remember, you’ll mainly use escrow as a money holder while making the biggest purchase in your lifetime—a house! But you’ll also use it after you close on your home too. Let’s unpack both scenarios.

1. Escrow Account for Home Buying

First, you’ll probably use an escrow bank account when you find your dream home and the seller accepts your offer. Here’s how that works:

• Agree on an escrow agent. Your real estate agent will probably recommend an escrow agent who both you and the seller agree on. This escrow agent could be a professional title agent, a real estate lawyer or a mortgage loan officer.
• Deposit earnest money. You’ll be asked to put down an earnest money deposit—a small percentage of the home sale price, which you’ll make payable to the escrow provider. They’ll hang on to your money until the sale is final. 

Earnest money acts kind of like a security deposit that shows the seller you’re serious about buying their house. In return, they agree to take the home off the market, make it available for inspections, and carry out any agreed-upon repairs or provide disclosures to help see the sale through. 

When you finally get to closing day, the earnest money will be subtracted from the amount you owe the seller and put toward closing costs. If for any reason the seller doesn’t make an agreed-upon repair by the closing date, then money can be held from them in escrow to cover the cost to you. And if the deal falls through? Don’t worry: You’ll get your earnest money back minus a small cancellation fee.

2. Escrow Account for Mortgage Payments

Okay, even after you purchase a house, most mortgage lenders will request you have an ongoing escrow account for taxes and insurance.

This escrow account will be in your name, containing money paid in by you, and accessed by your mortgage lender. Here’s how it works:

• Set up account. Your mortgage company sets up your escrow account after you’ve closed on your home.
• Make payments. Then, you pay into it every month as part of your monthly mortgage payment.

A homeowner escrow account isn’t the most exciting thing in the world because its only purpose is to give you one place to pay for expenses like home insurance and property taxes. But at least it means you won’t have to worry about paying for those separately on your own. Also, you’re usually required to keep two months’ worth of escrow expenses in your account at all times. That’s to make sure you’re covered if your tax or insurance bills increase unexpectedly.

How Does an Escrow Account Work?

Imagine it’s closing day for your house purchase. Yay! The champagne is on ice, and you’re signing the paperwork at your real estate attorney’s office. This is when you’ll get the breakdown of your monthly payment to the mortgage lender. 

To understand what’s included in your monthly mortgage payment, think of the acronym “PITI.” Here’s what that stands for:

• Principal
• Interest
• Taxes
• Insurance

Taxes and insurance are the parts of your monthly payment that will go into your escrow account and be held by your lender to pay property taxes and home insurance each year. The reason mortgage lenders want you to have an escrow account is so they don’t have to worry about you falling behind on these important expenses. In the end, you don’t want to lose your house, and they don’t want to lose the money they’ve just loaned to you! And like we pointed out, an escrow account is also helpful to you because you don’t need to stress about making sure your property taxes and home insurance are paid on time each year. The escrow account does that for you!

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