What is title?
Title is often referred to as the "bundle of rights" which constitutes ownership of a piece of real property. The ability of the seller to deliver clear and marketable title is a condition referenced in many sale agreements. "Title" is what the seller sells and the buyer buys.
What is title insurance?
Title insurance is an almost invisible product in a real estate transaction. Although it carries protection, only the lender involved in the transaction typically reads it. Consumers seldom read or discuss their title insurance policy. It is important to note that in most sales or refinance transaction involving a lender, the condition of the title may affect loan approval as the lender could refuse to accept a policy with undesirable encumbrances that might not be removed.
What is an escrow?
Escrow is the deposit of documents and funds with a neutral third party with specific instructions as to how they should be disbursed. Escrow acts as the clearinghouse for the exchange and distribution of those documents and funds in connection with transfer or financing of real property. An escrow agent represents neither the buyer nor the seller. The escrow agent can act only on each party's behalf according to their written instructions.
In a typical sale transaction, the escrow fee is based on the purchase price.
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What is a Escrow Impound Account?
An impound account (also called reserve or escrow account) is a trust account set up by the lender to pay for property taxes, fire and hazard insurance premiums and mortgage insurance premiums. The borrower pays a portion of these expenses each month, along with the loan principal and interest payment. When taxes or insurance premiums become due, the lender pays them out of the impound account. When the loan is originated, the lender asks the borrower to deposit an initial amount into the impound account. This is usually in the range of 5 months to one year worth of payments.
Typically when a borrower puts down less than a 20% down payment, the impound account will be required by the lender. When the borrower puts a down payment of 20% or more the impound account is optional.
What impound escrow accounts do for home buyers:
Guarantee that bills are paid on time. Homeowners do not have to worry about coming up with several large, lump sum payments, each with different due dates, throughout the year.
Unexpected increases are taken care of by the lender. In the event of a property tax increase or insurance increase, the lender will cover this expense and pay the premium in a timely manner, assuring that the borrower does not default on the obligation and risk additional tax penalties or a lapse in insurance coverage. It is common for lenders to pay taxes and insurance premiums when they are due, even though all the money for these bills has not yet been collected from the homeowner.
The initial cost of the mortgage may be reduced by establishing an impound account. It is typical for lenders to collect up to 1/4 percent in additional fee income for waving the impound requirement. Mortgages with impound accounts are considered by the secondary market to be more secure than mortgages without impound accounts.