June 20th, 2022
There are a lot of moving parts to any real estate transaction, so it’s no surprise that many people get overwhelmed. From negotiating with lenders to talking to attorneys and real estate agents, it’s easy to get lost. On top of that, there are many fees and costs that need to be paid. We’re here to make it easier and explain one part of the process – escrow fees.
Even this part is not simple, but if you read until the end, you should have a firm grasp of what you are paying and to whom. We’ll explain what escrow fees are, how to calculate them, and why it can appear that people use the term escrow fees to refer to different things. So let’s start.
Escrow fees are the costs that are paid to the escrow agency or company that handles the distribution of funds and documents during a real estate transaction or any other transaction that involves escrow.
In simple terms, escrow fees are the fees you pay to your escrow company for their services. However, the reason the term escrow fees may seem to refer to multiple things is because:
Once again, an escrow fee is what you pay to your escrow company for their service. But because every real estate transaction contains a lot of interconnected parts and people often don’t clearly differentiate between escrow fees and the three points above, it can be hard to understand what you are actually paying for with escrow fees.
So let’s make a clear delineation between these four notions.
Closing costs are a wide set of fees that are typically between 3-6% of the purchase value of a property. Many things are included in the closing costs, such as a loan application and origination fee, home appraisal, insurance premiums, real estate agents' commissions, etc., and escrow fees.
So, what you pay your escrow company is only a portion of the closing costs, thus closing costs and escrow fees are not synonymous.
You may encounter ‘escrow fees’ that are 1-2% of the purchase price. This is not the fee you pay to your escrow company. If you see this, you can be reasonably sure that ‘escrow fees’ refers to the true escrow fees you pay to your escrow agency plus other third-party costs that are held in an escrow account (such as attorney fees, property taxes, insurance, etc.)
The third sticking point is estimated escrow and it has nothing to do with the escrow fees you pay during closing. When you take out a mortgage loan, you will find an ‘Estimated Escrow’ section in your loan estimate document.
This is the approximate value of your property taxes and homeowners insurance per month. The money for your property taxes and homeowners insurance is held in an escrow account separate from the one that is used for closing on a house.
This separate account is required by most lenders when you take out a conventional mortgage loan. Consequently, some people may refer to these monthly payments as escrow fees because they are paid from an escrow account, but they are not the fees you pay to your escrow company.
Now that you, hopefully, understand what different people may mean when they use the term escrow fees, let’s explain how the actual fees you pay an escrow agency for their services are calculated.
Escrow companies charge a base fee and an additional fee based on the purchase price to both the buyer and the seller.
So, for a house that sold for $500,000, both the buyer and the seller would be charged between $750 ($250 base fee + $1.00 x 500) and $1,750 ($500 base fee + $2.50 x 500).
As you can see, the price range is rather large, so it’s worth shopping around for escrow services.
Usually, the total escrow fee is divided by the buyer and the seller, but it’s not set in stone. In a seller’s market, like it is currently in most of the US, it wouldn’t be too out of place if the buyer offered to cover the escrow fees to sweeten the pot.
Lightspeed Escrow provides speedy and accurate escrow services at a low cost. We are a group of real estate professionals that know the ins and outs of real estate transactions. Our mission is to help you in the closing process and make sure it is not delayed because of badly handled paperwork, technicalities, or unexpected costs.
If you want to avoid unnecessary complications and avoid paying excessive escrow fees, contact Lightspeed Escrow.